Keying on the Dollar Index to Forecast Stocks & Gold

Posted by Bigtrends on July 8, 2012 6:53 PM

Keying on the Dollar Index to Forecast Stocks & Gold

The term 'stock market predictions' is a very controversial term and can give off a negative/non-credible overtone to some traders, investors and the general public.  We all know that no one can predict the market with 100% certainty, but using tools you can gain an edge and have accurate prognostications for the market in various ways more times than not, if done correctly.  Keep in mind that the term 'market prediction' is also known as a 'market forecast' or 'technical analysis outlook' and is basically some version of an educated, estimated guess of where the price for a specific investment is likely to move in the coming minutes, hours, days, weeks and even months.

[BigTrends Editor's Note:  In addition to the author's above comments, keep in mind that technical analysis, charting, indicators, systems etc are based on the actual price movement of a stock, commodity, index, etc.  Therefore they do show the actual buying & selling of real investors both large and small -- supply/demand, cycles, trends, patterns, they are all there in the charts,screens & technical indicators.  They tell a logical (or sometimes illogical) story of where a security is in terms of trend, momentum, support/resistance, etc.  'The Chart Tells The Tale" is an often-used phrase that has been around for nearly 100 years (and in the case of Candlestick Charting, for hundreds of years) for a reason -- there is a validity to this form of market/trading analysis.  And in the case of the choppy market we've seen over the past 15 years, it has been the most effective way to take profits out of the market in BOTH directions (in our case, we prefer to use the leverage of options to to do so) -- which is why it has continually gained popularity and "mainstream media" acceptance ... as well as the fact that many of the largest hedge funds and institutions now acknowledge that they use various forms of momentum, relative strength, volatility, etc in their asset allocation decisions.  Also keep in mind  the the correlations the author points out between the Dollar, Gold, and stocks ARE NOT set in stone ... they change over time and are fluid, for example Stocks & US Dollar have rallied in tandem together in the past.] 

Getting back on topic, this report clearly shows how the US Dollar (UUP) can play a dominant role in the price of other investments.  Understanding how to read the Dollar Index (and analyzing the inter-related nature of many asset classes) will make you a better trader all around when trading stocks, ETF's, options,or futures.

The charts below clearly shows an inverse relationship/correlation between the stock market and the dollar index.  Knowing how to read charts (candle sticks, chart patterns, volume etc...) is not enough to give you a winning edge.  You must also understand inter-market analysis, as all markets are linked together in some way and the dollar plays a major role in where stock prices will move next.  Review the charts and comments below on how I came up with my stock market projections and trade idea.

S&P 500 Index (SPX) (SPY) & Dollar Index - 10 Minute Chart:

Gold (GLD) is another investment which is directly affected by the price of the dollar.  Review the chart below for more details.

Gold & Dollar Index- 10 Minute Charts

Long Term Stock Market Forecast:

The weekly dollar chart is VERY IMPORTANT to watch as a short term trader and long term investor, because trend changes in the dollar means your open positions will also likely change direction.

So, if we apply technical analysis to the dollar chart as seen below, you will notice we are able to create a market forecast and predict roughly where price is likely to move and how long it should take to get there.  If the dollar can break above the red resistance level, then we can expect a rally for 4 - 8 weeks and a price target around the 87-88 level.

If this is the case then stocks and commodities would likely do the inverse price action and move lower, sharply lower...

Dollar Index Weekly Chart


In short, the next weekly candle stick on the dollar chart could be a game changer for those who are long the overall stock market.

I will admit that the current market conditions are not easy to trade, because of all the headline news rolling out of Europe each week along with economic data.  And I feel as though we have been tip-toeing through a mine field for the past 12+ months waiting for extremely negative news or extremely positive news to trigging a wave of buying or selling that will make our jaw drop, but it has yet to happen.  Remember to use protective stops and don't get over committed in a headline driven market.

Courtesy of Chris Vermeulen,