Monday, May 30, 2011

Dollar Divergences

We have a definite positive divergence in the macdh for the US Dollar Index.  A similar situation occurred in 2009 leading to a multi-month dollar rally.  Even if we see a retest of the recent May low, the positive divergence is likely to remain, and the outcome will also likely be the same.

For those who might assume this means the stock market will necessarily decline, the argument is not so clear.  While a negative correlation with the stock market has existed for some time, that has not always been the case.  In fact,  according to John Murphy, the normal relationship between the Dollar and stocks is a positive correlation.  It may be that we will see an inversion of the recent negative correlation with a rise in the Dollar supporting a rise in stocks.

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