Stocks Look Heavy
We are officially 3 weeks into the spring season in the United States and the US Equity market looks like it may shed some of its winter weight. The equity market has been moving up strongly since the panic bottom of March 2009. Strong trends do need time to consolidate and this trend looks tired with over head resistance nearby.
When trading stocks, trends follow volume. So if volume is rising and prices are rising, then we have a sustainable uptrend as it takes a lot of buying to keep the trend alive. However, if volume is falling, then the strength of the trend is questioned as a lack of buyers can cause prices to fall. We can see below that the weekly equity market volume has been declining as the prices rise. That is a clear sign of a weakening trend.
(weekly volume courtesy of stockcharts.com)
Here is a weekly chart of the SPX500 (which is available at FXCM for residents outside of the United States). It shows a partial upward retracement of the down move since the 2007 top. Prices are near the 78.6% retracement level (1383) of the former downtrend. Additionally, there are 2 other wave relationships showing resistance around 1350. We have a congestion of resistance in the 1350-1383 zone. So not only is the trend tiring, but it is running into a wall as well. This is similar to a car running out of gasoline while going uphill.
The Trading Opportunity
If you are currently exposed to US equities, it may be time to reduce exposure to that market or consider eliminating your exposure altogether. An aggressive trader may look to short that market, but consider waiting until we see a break of the support line. A break of the support line will bring us the added confirmation of the move.
If stocks do sell off, this could present some opportunities for safe haven currencies (CHF, JPY, and USD). Of these 3 currencies, the CHF looks the most appetizing to me. The USDCHF has been creating lower highs and lower lows on the daily chart since June 2010. There are 2 ways we can approach a trade with the USDCHF.
1. Enter at the black downward sloping resistance line (near .9400), or
2. Enter a breakout going short below yesterdays low (.8894 entry).
Jeremy Wagner contributes to the Instructor Trading Tips articles.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.