My Life My Trade

Folks all over the blogs are wondering – why the heck are we going up, up and only up. This article is in a series of two articles. Here I want to show you why we are going up. And then in the second article, I will prove to you that we are not necessarily going up.. In fact, we might have gone down quite significantly over the past week or so

Below is the 2-hour chart for EUR-USD (EUR-USD accounts for more than 60% of the dollar index.. so I have chosen to focus on that only and not on the dollar index for now). You will notice that EUR-USD has been in a perfect upward channel since early mid-April. And as long as it continues to be that way, we will continue to melt up in higher.

For any significant downward move in the indices, this channel has to be broken conclusively. At this point, it would amount to first breaching the channel, which would be going below 1.4100 AND in my opinion taking out 1.3800 (which is where the previous bounce up point was). Going down to 1.4100 should take us to 930 and down to 1.3800 will take us to 910 region.

Ok, now I have talked a lot of facts, which a lot of you already knew. Where is this chart headed next? IMO, the reversal is quite near. And here is the reason why? I am a big believer of sentiment, and extreme sentiment often creates tops and bottoms. Today, everyone, almost everyone knows that dollar is tanking.. even the newspaper boy (no offense intended here) knows that… Everyday there is some headline talking about how dollar is continuing to tank. When something becomes a household/common talk, it ceases to be the reality. (Some fascinating examples that I have read elsewhere of extreme sentiment: (a) The day FOX launched their business channel was the top of S&P 500 back in 2007, (b) Back in late 2007, there was an article in newspaper that said that in Google even the person who offers massages to employees is a paper millionaire now – guess what, that day marked the peak of Google stock price).

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Here is the chart that plots both the ES futures and EUR/USD. You can clearly see that the “direction” of the moves are very highly correlated. Note that magnitudes may not be, but the direction is clearly correlated.

Ever since we breached the 23.2% retracement of primary {1} on April 29th, SPY has been range bound between 88 and 93. It has gone up and down nicely in channels, as is evident on the 30 day hourly chart seen below.

At the same time, if you would observe the daily chart (below) for the same period, one will notice how the stochastic is come down from overbought to almost oversold in this time period. So, the overbough conditions are being relieved with sideways movement. This is what sideways consolidation is known as.

We all know and agree that what we are witnessing is a bear market rally. Its just of a different nature.. different from the ones we witnessed all year long in 2008. The depths of March were reminiscent of what happened in 1930’s. When the market bounced back.. there were instances where the move from the bottom was as much as 80% in some cases. So don’t be surprised if after some more sideways consolidation we start going up again. The first leg of this move up was fueled by financials, then the commodities.. IMO big cap is going to move up next. Please don’t forget to share some love.