Dollar Telegraphs Market Bounce

Kevin Haggerty is on vacation for two weeks. During this time, we’ve asked
Joe Corona, Senior Trader for Tony Saliba, to write the lead morning piece.
Kevin will return on August 12.

in the day yesterday, there was a disconnect

between the stock market and the FX market where the dollar was making new
highs while the market was making new lows. I noted this activity in an

and stated: “Dollar closes on the high while the market tanks…I
smell a rat, keep a tight leash on your shorts.”

I am mentioning this, because it is important to keep an eye on
all of the
financial markets. You never know where the activity is going to originate, and
sometimes the FX, bond, or the commodity markets will give you a tipoff as to
where the equities are going.

Not surprisingly, this morning we find the dollar sharply higher and the equity
markets well bid. The official excuse is that FX traders are now anticipating
stronger U.S. growth as a result of upcoming rate cuts (even though the last 12
did nothing — I guess this one is going to be magical). Whatever. I am a
technician and a tape reader, and the tape and the charts still stink, and I
will be waiting to sell.

We need to keep an
open mind, however, and if the dollar and the market decide to move in the same
direction, the charts of the currencies look constructive for the dollar. The
September euro futures (below) seem to be forming a nice head and shoulders top
as is the Japanese yen (further below).

Now the dollar and the stock market don’t necessarily have to run in the same
direction, indeed, a strengthening currency could even damage the market
further, but if the dollar and the stock market do decide to run together it
looks as though there may be some potential for a bounce (based on the charts
of the currencies only at this point).

If this proves to
be the case, I will be waiting to fade the rally with longer-term option
strategies while daytrading from the long side and keeping one foot out the
exit door.