S&P500 & USD Index Bounce Or Break

Hello Forex Traders,

Recently I opened up an S&P 500 chart and I noticed something quite interesting. The index is right at the top of a weekly uptrend channel. Will the index be able to break through this resistance and march forward? Or is it topping out and could it fall back to, for example, the bottom of the uptrend channel? Only time will tell, but obviously the index is residing at a crucial bounce or break spot.

S&P 500’s uptrend channel started back in March 2009, 4.5 years ago already, after the financial crises hit the U.S. and the global economy very hard. The index dropped down to 670 at that point. The recovery has been quite stable, and has seen 1 major pull back in the summer of 2011 (break of the thin dark red dotted lines).

TREND CHANNEL

The trend channel (purple) is a well established formation with many hits on the bottoms and tops. The angle of the channel indicates a sustainable movement.

Price has been accelerating in its speed since November 2012. The steeper daily uptrend channel (blue) captures that perfectly.

Due to price moving more steeply in that daily blue channel, it is in fact crossed all the way from the bottom to the top of the weekly uptrend channel.

25- 9- 2013 sp w

DAY CHART

The top of the weekly trend channel (purple) has contained price three times recently. A daily rejection candle on May 22, August 6, and recently September 19 were created right at the top trend channel line. In the case of May and August there was a correction +/- 20 days. Will we the same happen now?

25- 9- 2013 sp d

Price will give us the answer to that question. And it will speak when it approaches the bottom of the blue daily channel (bounce or break) and the top of the purple weekly channel (bounce or break), and tell us whether the long-term resistance can contain price or whether the short-term power is there to push ahead. There are signs of double daily divergence between the tops, which traders should be aware of.

Let us compare the S&P 500 with the USD index.

COMPARISON WITH USD INDEX

While the S&P 500 bottomed out during February 2009, the USD index topped out that month and year. A strong correlation is of course present:

1)      Prior to the financial crises: when S&P 500 was growing earlier in the previous decade (2000’s) the USD was decreasing in price

2)      After the financial crises: the opposite occurred when the S&P 500 lost value and the USD rose in price

The correlation breaks down a bit after that spike. The S&P500 index kept it’s upwards momentum. But the USD index did make noticeable upside gains despite the uptrend in the S&P 500.

The index in fact has been unable to break the bottom dating back to May 2008 and the top dating back to March 2009 and has been bouncing up and down between those 2 peaks.

What has been created? A massive wedge (black lines).

For the USD the trade to look out for is either:

1)      A move back to the top of the wedge (green circle)

2)      A move back to the bottom of the wedge (red circle)

Before price can move down to the bottom, it will need to break through potential monthly support (trend line and horizontal level), which means that until that happens the USD could be in a bouncing spot for more strength despite last week’s FOMC surge.

There is still some space to the monthly trend line (green), which could indicate one more upside on EURUSD and GBPUSD before they run into bigger resistance and the USD into bigger support. We will need to monitor how price will react to that level when it gets there to assess the odds of a break or bounce.

In any case, the USD index volatility on the weekly chart has dropped considerably when comparing it to previous years. Please check the ADX at the bottom of the chart.

What is your opinion on the USD? Will there be a bounce up or a break down?

25- 9- 2013 usd index w

Thanks for sharing this article and wish you Good Trading!

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