Back on January 6th, we posed the question, “Is a major inverse correlation breaking down?” The question was in relation to the inverse correlation that has existed between the U.S. dollar and the S&P500 since at least May 2011. At the time, the dollar had closed at its highest level in 11 months and SPX was nestled just under its October highs.
The question then becomes, is this inverse correlation finally breaking off or is there simply going to be a delayed reaction? If it the answer is the ladder then we should either see the dollar decline or SPX decline sharply very soon.
-@ the bell 1/6/12
Well here we are a month later and the answer appears clear: the inverse correlation still remains in tact. The reaction was indeed delayed but true enough, the dollar has fallen to 8 week lows while SPX has risen to 8 week highs. One should note though that the dollar appears to still be in a tactical uptrend and is attempting to find support around current levels. This is also happening while the S&P500 is testing resistance around 1,350 so we should see if the inverse correlation plays out even further here.
The $78-$78.50 level that the U.S. dollar currently finds itself attempting to find support above was an area of previous resistance in early October and late November. As is the case in technical analysis, a bullish signal is generated when previous resistance becomes support. Why? Because in doing so that new found support generates a “higher low” on a chart and higher lows are a necessary characteristic of any uptrend. Should the dollar continue to consolidate at this potential support level and curl back north, that would be our first clue that a pullback for the S&P500 is in order.
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