Nothing like some geo-political drama to throw in some extra uncertainty into carefully laid out trading plans.
After North and South Korea exchanged pleasantries early Tuesday, the dollar’s relief rally continued in dramatic fashion with a 1.3% gain. I am now even more convinced that the dollar will, sooner than later, retest the resistance at the 200-day moving average (DMA).
The dollar index drifted downward for three days after last week’s impressive punch through the resistance of the 50DMA. The drift ended Monday. On Tuesday, the dollar index launched a picture-perfect, and convincing, bounce off its 50DMA. This line now becomes support.
The dollar was also strong enough to push the British pound below the 50DMA for the pair for the first time in two months. I expect this milestone to be just as significant as the euro’s break last week below its 50DMA versus the dollar. In other words, the dollar’s relief rally is gaining steam.
Source: dailyfx.com charts
In parallel to the dollar’s strength, the stock market continues to weaken. Tuesday’s 1.4% loss on the S&P 500 has confirmed resistance at the early November breakout. The good news for the bulls is that the uptrend marked by the 50DMA remains intact (just barely) and selling volume was only average, likely due to the holiday week.
*All charts created using TeleChart:
The fresh selling took T2108, the percentage of stocks trading above their respective 40DMAs, back to the levels from last week that helped me guess that the bulls would successfully defend support at the 50DMA. While I am doubtful the bulls can pull a second rabbit out of the hole, I still expect a shallow sell-off when we hit some kind of bottom for this phase of market movement (T2108 is now at 43%. The oversold threshold is at 20%). I will not be surprised if we end the year right around current prices.
Be careful out there!
Full disclosure: long SSO puts, short EUR/USD, short GBP/USD