The Inverse Dollar Relationship, SPX and Fear

Dec. 16, 2010 - PRLog -- So far this week we have been seeing fear creep in the equities market. This Wednesday we started to see fear (green indicator) reach a level which tells me to start looking for the market to bottoming. I do follow a few other charts and indicators which warn me of a possible trend reversal (high probability setup) before it takes place but the US Dollar and selling volume are key.

As we all know, when the market is trying to top and roll over it tends to be more of a process than a couple day event. It’s this lengthy topping process which has a lot of choppy price action sucking traders into a position much to early or shakes you out of the position before the market does what you anticipated. Knowing that tops tend to drag out for an extended period of time is critical for an options trader simple because of Theta (time decay)

On the flip side, bottoming is more of an event because it tends to happen after a strong wave of panic selling. Fear is the most powerful force in the market (other than the Fed/Manipulators.. but that’s another topic). That being said, when you know what to look for in bottoms you can generally see the market starting to bottom and prepare for it.

The charts below of the US Dollar Index and the SPY clearly show the inverse relationship they have. Right now it seems everything is directly connected with the dollar… it has been like that for most if the year… I will note that its not normally this clear. Anyways, the dollar is currently trading at resistance which means there is a good chance it will turn back down. So if the dollar drops, then it should boost the SPY (equities market) and put in a bottom for stocks.

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