Tuesday, July 5, 2011

FXE and UUP: The FX-factor

Last week I posted about how the US dollar and the Euro are key to understanding the market. I explained that I was suspicious of the big S&P 500 rally on Friday because the major currencies did not follow. This week, as stocks continue to float up, my position remains the same.

The Euro typically trades inverse to the US dollar and in synchronicity with the stock market. If you look at the chart below, you'll see that the Euro (FXE) did not participate in Friday's rally nor has it moved up since. Also notice that it has not moved above the key blue trend-line. The pivot high at 144.86 and this trend-line remains strong resistance. These levels roughly correspond with inverted support levels on the US dollar charts.

Unless FXE can trade and close above these levels, I have to be suspicious as the stock market continues to float. I'll continue to stake out good short entries further up in charts and maintain stops on my current positions. If the FXE does breakout, I'll expect the market to trade back up to 2011 highs. If it doesn't, look out below.

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