Euro / $USD

Just before the close I posted, "Someone Knows Something About the Euro". Recently the currency ETFs have not been giving great signals, to even see a signal is encouraging, to see a signal that fits with expectations and what is needed to fulfill those near term expectations is even more encouraging.

The correlation between the $USD and risk assets like stocks and commodities is pretty well established, however the $USD has an inverse relationship and for posting charts it is more difficult to pick out divergences because of the inverse correlation, I use the Euro as a proxy because it is correlated positively with risk assets and makes it easier to see divergences. Furthermore the EUR/USD FX pair make up 50% of the $US Dollar Index, so the correlation between the Euro and risk assets is reliable.

Here's are a few examples...

 SP-500 (green) vs FXE (ETF for the Euro). Directionally the correlation is pretty solid, no correlation is perfect and that is the reason arbitrage traders exist. You can use these failures of correlation to help in your analysis as they often result in corrective moves. At the red arrows the Euro (FXE) in white has failed to make a new high with the SPX and there's a nearby reversal shortly after, at the white arrows the Euro is stronger than the SPX and there's usually some upside in the SPX, in each of these cases the Euro didn't make a new low or lower low with the SPX, but generally the correlation is pretty solid.

Here's the SPX vs the Dollar (UUP), as you'll see there's an inverse correlation, so picking out these divergences is a little harder if you aren't use to divergence analysis.

Note how the $USD is nearly the mirror opposite of the SPX, when the $USD is strong it makes risk assets more expensive, when it is weak risk assets are perceived as cheap. A good example is oil which (except in a very few recent and rare cases) trades in $USD all over the world. Assuming all things are the same in oil as far as cost, supply, etc (in other words oil is stable), oil prices have to adjust to currency fluctuations. As oil is priced in $USD, if the dollar goes down, oil prices must rise to make up for the loss in the dollar. A strong dollar usually sees oil prices drop.

 Here's the USO / Euro (FXE) correlation, if we used the $USD if would look similar to the SPX chart above.

Here is Gold (GLD) vs the Euro, so as you can see, a weak Euro typically leads to a weak stock market and other risk assets like commodities. A strong Euro gives the market breathing room to move higher and typically follows that correlation, that is why today's signals in the Euro and $USD are interesting.

 Here's the Euro today via the Euro ETF (FXE). We see an early positive divergence off the 11 a.m. lows and then a leading positive divergence that gives up ground as the Euro refuses to move higher, toward the end of the day, the last 2+ hours we have one of the first clear positive divergences I've seen in a while in the Euro, it is actually leading positive and in a rather flat area of trade (this is a common area to see divergences form).

 The 2 min chart shows similar divergences at the same times, the end of day divergence is very strong and hitting a new leading positive high, even as the Euro is at the day's lows.

 Here's the longer term trend of the 2 min chart above, you can see a clear negative/leading negative divergence sending the Euro lower, but over the last 3 days we started with a relative positive divergence and built in to stronger relative positive divergences and ended with a leading positive divergence-this is a normal progression for divergences.

 While I welcome near term Euro / Market strength so we can pull off a few more trades on the short side in to market strength, I want to also show you the big picture in the market which is bearish. Here on a 30 min chart (a much more important long term trend) we see a very strong negative divergence with a head fake move above the resistance highs before the Euro collapsed. There are several other negative divergences, but the Green arrow showing trend confirmation is probably the most important as this suggests any near term Euro strength will be short lived.

 The 60 min chart shows the same a negative divergence at the top with a head fake move in price and down-side confirmation of the trend.

 Today the Euro saw some aggressive downside, but downside momentum has fallen off as the Euro starts to flatten out-Changes in character lead to changes in trends.

As for the $USD (which for confirmation of what we see in the Euro, we should see the opposite, negative short term divergences suggesting the dollar is being sold in the near term).

 The $USD (UUP as a proxy) on the 1 min chart shows several negative divergences over the last 2 days, these are also the two days that I suspect are a head fake move out of the bear flag, which would set up a bear trap and short squeeze in the market, that would give us the bounce I've been thinking we'll see before the market totally collapses. Note just like the Euro's afternoon leading positive divergence, the $USD saw an afternoon leading negative divergence, this is confirmation.

 The 2 min chart was showing confirmation at the green arrow, it quickly changed to a leading negative divergence even as the $USD moved to new highs.

 The 3 min chart confirms the above with a leading negative divergence. The longer the chart, the less detail and noise and more trend.

 The 5 min $USD/UUP chart went from confirmation to a leading negative divergence.

 Once again, here's the longer term perspective in which you can see numerous divergences moving the dollar, but most importantly for the big picture is the current leading positive divergence on this 60 min chart. This doesn't mean the dollar can't weaken and we get out bounce, but it does mean probabilities are very high that the big picture is dollar strength which equates to market weakness.

The daily chart of the actual Dollar Index shows several divergences that have moved it up and down, but again the main theme for the market's bigger picture is a developing leading positive divergence in the Dollar Index which is negative for the market.

In summary, it looks like there may be some catalyst to move the Euro higher/Dollar lower which may allow the market to get off a short squeeze bounce which I want to use to short in to strength, the longer term picture as we have seen in just about every analytical tool we use shows the market in a very dangerous position longer term.