(8/1/09)
Overall the market has now risen 5 months in a row since the
early March lows. For those that don't follow the US Dollar (USD)
there has been an inverse relationship during the past 10 years between the
stock market and the USD. The chart below
compares the USD to the S&P 500. Notice when the USD rallied
strongly in the late 1990's through 2001 (points A to B) this was followed by a
large sell off in the S&P 500 (points C to D). Meanwhile when
the USD got sold off from 2002 through 2007 (points B to E) notice the S&P
500 eventually bottomed in late 2002 which was then followed by a 5 year rally
(points D to F). Next the USD rallied sharply from 2008 through
early 2009 (points E to G) which was followed by another significant sell off in
the S&P 500 (points F to H). Meanwhile from March through July
the USD has once again sold off (points G to I) as the S&P 500 has rallied
49% since the early March low (points H to J). Meanwhile when you
look at the chart of the USD you can see two eventual outcomes in the longer
term. The first scenario is that the USD completed a 5 Wave pattern to the
downside in early 2008 and is now going through and ABC type corrective
rally. Currently we are seeing a B Wave pullback as Wave A completed
near 90 back in March. Also notice the 61.8% Retrace from the early
2008 low to the early 2009 high is just below the 78 level so that is a key
support area to watch in the weeks ahead. If we are seeing an ABC
type corrective rally then the Wave B pullback is probably nearing a
bottom which would then be followed by Wave C with an eventual rally back
into the upper 90s to around 100 possible in the longer term. Now if
the inverse relationship between the USD and the S&P 500 were to continue if
the USD rallied strongly then that would likely spell trouble for the major
averages in the longer term. Meanwhile the
second scenario would be for the USD to drop below its 61.8% Retrace just below
78 and then eventually retest the early 2008 low near 71 (point D) possibly by
the end of the year. If that were to occur then the rally that began
with the early March lows would likely continue as through the end the year if
the inverse relationship between the USD and major averages remains in
place. At this time
we don't know which one of these scenario's may occur in the months ahead.
However if the inverse relationship between the USD and major averages does
continue in the future then a major upward or downward move in the USD would
likely have a significant impact on the stock market in the future.
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