Examining the Year-End Futures-Forex Connection

• ragheehorner
• December 10th, 2009

I’m always looking at what effects the currency pairs that I trade.   Since the majority of my trades are “dollar-correlated” in some way I must know what’s effecting the dollar.  I come from a futures trading background and this has served me well again and again.  Now the relationship between, for example, the U.S. Dollar ($USDX) and the Dow Jones ($INDU) is not fixed and nor should I expect it to be.  So I am always reevaluating day by day, hour by hour, and across each time frame that I trade.

What I want to do here as we put in the final trades for 2009 is look at where these correlations are as 2010 rapidly approaches.

First of all, I like trading December BUT I don’t necessarily trust that it in any way is a look at what January will bring.  The low participation leads generally to low volume and price action that doesn’t really “mean” anything to the longer term view.  For that reason I focus on the short term…the really short term.  I’ll spend most of this month knee deep in five minute charts.  This slice of psychology is short term enough that as volume comes and goes, as financial centers open and close – I can stay nimble and not need a lot of follow-through to  1) trigger a trade and 2) see it follow-through.

So back to where the correlations now…

Knowing where the dollar is and what helped put it there is what consumes the first 20-30 minutes of my day.  For example, pre-market Dow Jones will give me an idea of what the equities effect will be on the dollar and then I have to keep in mind that when the 9:30am bell rings there will be another flood of opinion.

From the longer term (daily) view, it’s obvious that the U.S. Dollar Index ($USDX) and the Dow Jone futures ($DJ_F) are still inversely correlated.  No surprise here…but it’s good to keep tabs on.  In fact what’s often happening now because of this correlation is that “good” economic data is positively impacting the equities market and causing the dollar to sell off.   However there is a big shift, or more accurately transition, occurring in the dollar right now.

Notice that prices have traded higher through the resistance of the 34ema Wave.  This is the “line in the sand” I have been watching.  Until about six trading sessions ago I was a dollar bear, shorting bounces as they were still within the context of a weakening market.  And even though I don’t think December is a great month to see a change in the trend as strong and persistent as the dollar’s mark down was…I won’t – I CAN’T argue with price action!

Now I think that the dollar isn’t necessarily strong now but rather entering the volatile sideways cycle of distribution.  In this cycle a lot of traders will get whipsawed until either the uptrend gets some buying support or the downtrend dives back below the Wave and resumes.

And what makes it trickier is that if or when the December “window dressing” buying in equities begins, this will push the dollar back lower only to see the buying unravel in the first month of the new year.  Now I am talking generalities and likelihoods, the price must show that this hypothesis is one that proves to be right.  Until I see price confirming this, it’s just one of many December possibilities.

So what will dollar/Dow connection do to pairs like the $EURUSD ?

Currently the $EURUSD is weakening — notice it’s below the Support of the Wave now as the dollar rallies. Prices are currently support is resting on the 89ema and just above the 1.4700 psychological level.  The 76.33 resistance in the U.S. Dollar, the 10,235 near term low in the Dow, and the 1.4668 support in the $EURUSD is the perfect storm I am watching going into next week.

– Raghee, http://www.twitter.com/ragheehorner

Tickers: $DJIA, $DX_F, $EURUSD, $INDU, $USDX

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