Thursday, November 12, 2009

Stock Market Correction Imminent?

The American stock market has had a recent history of an inverse relationship to the U.S. dollar. When the U.S. dollar is declining in value the U.S. stock market generally rises; when the U.S. dollar is rising against other foreign currencies the U.S. stock market usually corrects(declines).

To view a five minute video presentation by Peter Worden of Worden Brothers Inc. graphically illustrating this behavior click the title link of this article. Notice that when the dollar broke support and nose-dived the week of March 16th, 2009(video) the US stock market reversed course from a downward slide leading to the current bull market(uptrend). Notice also that when the dollar started a rapid ascent in August 2008(3 day chart in the video) the stock market reversed course, ending a five year bull market(uptrend) from 2003 to 2008 leading to the market crash from August 2008 to March of 2009.

Am I predicting another stock market crash similar to the August 2008 to March 2009 correction(decline)? No, but the dollar technicals(charts) indicate that this may occur if the current bounce in the U.S. dollar turns into an uptrend. Remember that the trend of the dollar and stock marked are inversely related i.e. if the trend of one is up the other trend is down. A similar technical relationship exists between bonds and interest rates. If interest rates rise the value of bonds declines. Therefore I do not recommend buying bonds if interest rates are rising. By reading charts, turning points in trends can be spotted more easily.

Most analysts do not foresee a resumption of the dollar uptrend on a long term basis for several reasons. First, the US government is running the printing presses full throttle increasing the U.S. debt to levels that no one would have ever imagined just a few years ago. As the amount of money borrowed from the Federal Reserve Bank (private, not government owned) by the U.S. government increases, the likely hood of paying down the debt decreases leading to a lack of confidence that the U.S. government will be able honor its future financial obligations. Secondly, the more money put into circulation (increase in total credit) by borrowing from the Federal Reserve Bank, the more diluted the value of the dollar becomes leading to a decline in its value.

I highly recommend Worden Brothers software (Telechart) for trading stocks or mutual funds. I have used it for over ten years. You will make better trading decisions if you educate yourself by purchasing a few books on how to trade and how to read candle stick charts. Buying a stock or mutual fund without reading its chart and a few basic technical indicators is like driving a car blindfolded!


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