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What Will it Take to Turn This Market?

Fear gripped the markets as sellers dumped stocks, commodity futures and emerging markets stocks. So what was up?

Well, the U.S. dollar was up.

U.S. Dollar Chart

The dollar rose again yesterday, following an announcement by the European Central Bank (ECB) that rather than raising interest rates, which was widely expected, they would "watch prices for the next few periods." For weeks, the euro had been rising versus the dollar in anticipation of a rate hike. Now with the disappointing response from the ECB that rates will remain low, funds flowed back to the buck causing a big jump in the dollar chart, not unlike the two false violations of the downtrend line in April when similar actions were anticipated.

Technically, every rally in the dollar this year has been contained at slightly above the downtrend line (red dashes). None has even approached the blue 50-day moving average line. In the unlikely event that the dollar holds above the trendline and successfully attacks the 50-day moving average, the direction of many markets would turn. But the chances are strong that the dollar will resume its downtrend in a day or two. And since oil futures and other commodities are denominated in dollars, they too will likely regain some of the recent losses.

DJI ChartTrade of the Day Chart Key

The leading index, the Dow Jones Industrial Average, is holding above its breakout line at 12,450. And there is a broad zone of support that starts at the bullish support line at 11,900. Additional support is provided by the intermediate line at 12,400, as well as the Dow's 50-day moving average.

VIX ChartTrade of the Day Chart Key

Finally, let's study one of the most widely watched sentiment indicators. Note the jump in the CBOE Volatility Index (VIX) to the line at about 19. The VIX, sometimes called the "fear index," has held below the 50-day moving average since late March. A move above that line and the 200-day moving average could cause some concern. That's not likely since the AAII sentiment numbers, an inverse indicator, show that bullish sentiment fell 2.4% last week from 35.5% and from 43.59% on April 7.

Conclusion: The sudden rise in the dollar appears to be in reaction to the ECB's rate decision. When the smoke clears, the uptrend in the stock market and other markets will most likely be re-established.

For one gold stock to buy, see the Trade of the Day .

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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