S&P Ending Diagonal Signals Usd Strength In 2010
The U.S. dollar is trading higher, at the same time as equities are higher, in the new correlation that has been in place since the U.S. Non-farm Payroll release of the 4th of December. Since then the U.S. dollar index has gained sharply in a very short period of time, from the 74.00 region to its current levels around 78.50, while the S&P 500 is trading at new highs of 2009, around 1120.
Some traders are expecting to see a lower stock market in the early stages of 2010, or at least to see a correction, considering the very powerful bounce from the 670 lows that were set in March on the S&P 500.
From an Elliott Wave perspective, the correction, or move lower off the recent rally, seems to be confirmed as the market forms an ending diagonal technical pattern, shown on the four hour chart below.
An ending diagonal pattern can appear only in wave five or wave c position, at times when the preceding move has become over-extended, and indicates a potential turning point.
Each sub-wave of an ending diagonal is structured by a three wave move, labeled as red waves a-b-c in our case. Currently, the market is trading in the wave c leg, which is a final leg of a blue wave 5). The target for a reversal is shown around the 1125-1130 region where the top may be hit.
The wave count signals for a weaker stock market over the next few months, with most importantly, a stronger Usd against the majors. The dollar is trading higher at present in the face of a stronger stock market, therefore any move lower on stocks will accelerate the current Usd rally.
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Disclosure: No positions.