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Dialing for Dollars

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As I turn on the terminal today, I see that the dollar is weak, bonds are strong (lower yields) and equity futures are down moderately. This is what everyone has been referring to as the "macro trade" lately. In other words, traders and investors are not (in theory) using individual stocks or bonds due to their fundamental attractiveness, but are trying to make money by capturing the move of various financial instruments based on their seemingly direct relationship.

Over the past few weeks, the concept of stocks and bonds going in different directions due to the move in the U.S. currency has become very popular and should be looked at in possibly explaining the day-to-day moves in an otherwise unexplainable random market.

There has been a pretty clear relationship of the asset classes over time and I thought a technical look might make sense over both the near-term (daily) and intermediate-term (weekly). Basically, the daily charts show that all three financial vehicles are in a very well-defined range (shocker) and that they do have a direct relationship with one small difference over the past few sessions that bears watching. Over recent days, the dollar has shown weakness while bond yields and stocks have remained at the upper end of their range. This is a slight difference of late that may be important -- unless the dollar begins to strengthen, it may be an early indication that bond yields and stocks may be headed down to the lower end of their respective ranges.

Stocks remain near the upper end of the clearly defined range...




Treasury yields show a similar move ...




But the Dollar Index (TXA) is at the lower end of its range.


The weekly charts suggest a trend change is not imminent. That isn't to say it won't happen, but if you look at the charts without any bias, they all remain in a downtrend. In other words, until there is a change in trend for at least one, stock prices, 10-year note yields and the Dollar Index should remain in an intermediate-term downtrend. Again, in my view it appears that the dollar may hold the key. There the downtrend is steepest, so it may be the first to be broken. If that were the case, then a trend break in stocks and bond yields should not be that far behind.

The SPX is still a bit away from a trend break, although support has held so far ...




It would take a major back up in yields to change that trend ...




Similar to the daily view, the weekly chart suggests the dollar has the best chance of trend break...




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