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.

FM.to Short Setup

FM.to is coming into good resistance. If the market has another leg up, this short will likely trigger sometime tomorrow.

The short is based on the hit of a double-top at 147.50 after a very extended up-move. The stop should be placed above 147.50 level, using whichever method you prefer.

FTS.to

Weak showing for TSX60

The TSX60 Capped Index ended up 0.62% Monday while US markets were closed for the July 4th long weekend. On Friday US markets rallied sharply while Canadian markets remained closed.

As you you'll recall from last night's article, I expected the markets to gap up by approximately the same percentage basis as the US markets rallied Friday. This was not the case as the TSX closed up only by about 1/3 the latest SPY close. In fact, earlier in the morning the TSX was actually trading negative.

Float up, fade down.

This kind of showing is interesting. The fact that the TSX under performed the S&P 500 by a good margin shows that perhaps some of the exuberance of Friday's rally has faded. It also confirms my suspicion that the TSX might lag as it had not yet hit major resistance just above Thursday's close.

If the TSX does continue to push higher it will hit strong resistance at the 860 pivot low and ascending trend-line. If Tuesday's market pulls back, the 50MA at 850.95 will remain a barrier.

With Canada's exchanges re-opened, what remains to be seen is how the US market trades post holiday weekend. The SPY is arguably in a more precarious position as there is no real support until all the way back at 132, the breakout level from Friday afternoon's initial spike. On the other hand if US markets continue up, there's no real resistance until just above 134 and then all the way back to the double top at around 137.

The futures will be re-opening for the week shortly and I'm eager to see how they perform. I'm still short the market and will be looking to get more short in the event of further upside. Personally, I think it's likely that Tuesday is an uneventful day with little price movement either up or down.

If any news is released overnight, I'll re-evaluate my position. Follow me on Twitter to stay up to date with my latest thoughts.

The Week Ahead for the TSX

The week going forward will be an interesting one. I'm eager to see how the Canadian markets react to the sharp rally seen in the US on Friday after being closed for Canada Day.

Most likely, the TSX will gap up to match Friday's gains in the US. The question is where will it hit resistance.

You may recall that the SPX closed Thursday slightly above several resistance levels. The TSX60, as of Thursday, has not yet hit it's upper band of resistance on the daily chart. This includes the 200MA at 845.89, the 50MA at 851.53, the 61.8% fib at 854.26 and the blue trend-line at ~860.

Getting to these levels will take a good push up to be sure, but the fact that there is clear resistance ahead possibly shows a more definitive top than on the US S&P. And while it's possible we eventually break above these levels, it 's very unlikely that it happens before trading resumes in the US on Tuesday.

In any case, Monday's trading should be relatively uneventful. Once the initial gap up has occurred, I expect that the market will trade sideways or slightly up for the rest of the day. I'll be sure to post my initial reactions to the open on Twitter and post a summary here at the end of the day.

USD and the Euro--Keys to the Market

It's no secret that currencies play a huge role in setting the direction of the market, or at least it shouldn't be to anyone who reads this blog. Currency fluctuations are a powerful force. They exert an inflationary pressure on stocks and give us a clue to the market's overall appetite for risk at any given time.

Considering this, have a look at the charts below. One is of the the Euro and the other is the US dollar. If you compare them to the market indices, you'll notice that something is amiss. The markets rallied on Friday with an unrelenting fury, while the world's two major currencies hardly budged. When I'm faced with an incongruity like this I rely on whichever side I believe has the most credibility. Currency markets remain active and liquid even when equity markets do not, so I trust what they tell me.

The Euro generally trades inverse to the USD so we would expect it to mirror the markets--this was certainly not the case on Friday. FXE (the Euro) ended the day positive by just 0.18%, far under-performing the S&P's rally. The blue down sloping trend-line will remain resistance, at least for the short term. The series of lower highs since early May is also a bearish sign. For me to have faith in a continued S&P rally, the FXE will need to get above the blue trend-line and these previous pivot highs.

The US dollar had a similar Friday to the Euro with UUP closing down just 0.09%. UUP will have support at the as-of-yet untouched up sloping blue trend-line. Any bounce in the UUP will put pressure on stocks and stock indices like the S&P. Bulls should be discouraged by the fact that the US dollar showed little signs of breaking down in spite of a huge rally in stocks.

Irregardless of how currencies perform we need to respect price action, so I won't just discount Friday's stock rally out of hand. What I will say though is that the prospect of a continued rally next week is tentative at best without the support of major currencies. I'll be watching both the US dollar and the Euro closely before trading resumes next week as they will be the key to the markets. Check back here and follow me on twitter for my latest thoughts.

Friday June 1 Market Summary

Yesterday I posted about a possible up move in the markets despite technical resistance because of the low holiday trading volume. Today we got exactly that, but to an extent that even I didn't anticipate. The SPX rallied +19.03 to 1339.67, or almost $2 on the SPY. This is a very big move, so I'm glad I decided to wait until after the holidays to add a second round of shorts.

The trading session actually opened uneventfully and stayed in a narrow range, as you'd expect on a Friday before a long weekend. Then at 9:30ET, ISM numbers came out at above market expectations and the SPY spiked almost $1 within a single 10 minute candle. For the rest of the day, the markets floated on extremely light volume without ever pulling back.

It's hard to put much meaning onto this rally considering the volume, but the price action is all that matters at the end of the day. I'll continue to have a stop in place on all my shorts and will look to add further shorts higher up in the charts if the market continues to float. The market remains very extended and the probability of a pullback soon is still high.

If we do continue to rally next week, as we well may, I'll look to add more shorts on the market and on stocks at the the SPX 1346 and 1370 levels. I think it's unlikely we go as high as the 1370 double top, but it is possible.

Last night and this morning I posted several short setups that should play out when the market pulls back. And assuming we don't pull back before then, I'll probably enter some of these shorts mid next week.

• MCHP Short 
• LLTC Short 
• INTU Short
• FTS.to Short
• NXY.to Short
• CCO.to & FM.to

I'm currently short FTS.to and partially short the SPY and NASDAQ. I will be sure to advise of any future shorts on this blog and via twitter.

Key level: MCHP Short

MCHP is into strong resistance at the current levels. When the market pulls back, this stock should as well. I will consider shorting this stock if it pushes back to today's highs, otherwise I'll keep it on watch for next week.

There are five resistance factors here: the 50MA, gap fill, bear flag, 50% fib and a previous pivot.Good short between 38.34 and 38.67. I'll look to enter at 38.67.