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Saturday, July 12, 2003 10:19:20 AM
Dollar May Avoid the Summer Bear Trap by Jes Black
After moving opposite the equity markets since April the dollar has realigned itself with stock market movements over the past two weeks. This has traders again looking for direction from Wall Street. But that may lead to false signals now that the dollar appears in the beginning stages of a bear market rally, while stocks look set up for a bear trap bust.
Earnings Begin in Earnest Next Week
Only a handful of companies reported earnings this week, but the next two weeks will see about 300 S&P companies report. Given the low expectations placed on Q2, the outlook will be closely scrutinized for hints that a recovery is or is not in place. Considering that the consumer continues to tap the cheap credit tap, the Bush tax cuts will only add further disposable income, which may persuade companies that the outlook remains bright. However, only a return to business investment and profitability (without layoffs) will actually allow the markets to escape their bear trap.
Fibonacci’s Golden Phi
It is interesting to note that two years ago the summer selloff in the S&P from June to September erased 27% from investors’ portfolios. This was followed by a post 9/11 bear market rally which sent the broader market up exactly 61.8% (Fibonacci golden number Phi) from its lows. The subsequent selloff from April to October of last year shed another 400 points but has since recovered exactly 61.8% of its losses. In both instances the dollar fell alongside the subsequent stock market selloff.
Seasonal Tendencies May Depart
June's peak in the Dow and S&P may therefore mark the end of the rally in stocks, as lofty valuations and fading momentum are now facing a difficult seasonal period into October. But the sharp decline in the dollar since April and subsequent disquiet in the Eurozone has set the dollar up for a much-needed bear market bounce irrespective of the stock market’s gains or losses.
Head and Shoulders Tops
Stocks have also rallied to the upper trendline resistance of their October lows and are now in the process of forming a possible head and shoulders top. In December 2002, the same technical formation led to a break of the neckline support and a textbook decline equal to the distance between the head and neckline. A smaller version of the same pattern is now in the making.
Interestingly, this would take the index back below the 965-line which marks the much larger neckline of the 5-year old head and shoulders formation, which peaked in the summer of 2000. A selloff here could mean that the current rally was merely another bear market rally, which would bring the index back within its 3-year old down trend.
Source Forexnews
After moving opposite the equity markets since April the dollar has realigned itself with stock market movements over the past two weeks. This has traders again looking for direction from Wall Street. But that may lead to false signals now that the dollar appears in the beginning stages of a bear market rally, while stocks look set up for a bear trap bust.
Earnings Begin in Earnest Next Week
Only a handful of companies reported earnings this week, but the next two weeks will see about 300 S&P companies report. Given the low expectations placed on Q2, the outlook will be closely scrutinized for hints that a recovery is or is not in place. Considering that the consumer continues to tap the cheap credit tap, the Bush tax cuts will only add further disposable income, which may persuade companies that the outlook remains bright. However, only a return to business investment and profitability (without layoffs) will actually allow the markets to escape their bear trap.
Fibonacci’s Golden Phi
It is interesting to note that two years ago the summer selloff in the S&P from June to September erased 27% from investors’ portfolios. This was followed by a post 9/11 bear market rally which sent the broader market up exactly 61.8% (Fibonacci golden number Phi) from its lows. The subsequent selloff from April to October of last year shed another 400 points but has since recovered exactly 61.8% of its losses. In both instances the dollar fell alongside the subsequent stock market selloff.
Seasonal Tendencies May Depart
June's peak in the Dow and S&P may therefore mark the end of the rally in stocks, as lofty valuations and fading momentum are now facing a difficult seasonal period into October. But the sharp decline in the dollar since April and subsequent disquiet in the Eurozone has set the dollar up for a much-needed bear market bounce irrespective of the stock market’s gains or losses.
Head and Shoulders Tops
Stocks have also rallied to the upper trendline resistance of their October lows and are now in the process of forming a possible head and shoulders top. In December 2002, the same technical formation led to a break of the neckline support and a textbook decline equal to the distance between the head and neckline. A smaller version of the same pattern is now in the making.
Interestingly, this would take the index back below the 965-line which marks the much larger neckline of the 5-year old head and shoulders formation, which peaked in the summer of 2000. A selloff here could mean that the current rally was merely another bear market rally, which would bring the index back within its 3-year old down trend.
Source Forexnews
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