foxex: Dollar Drop

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, July 21, 2020

1. Gold and Silver make dramatic moves higher

2. Will stocks continue higher or hit resistance?

3. Trade the falling dollar with an ETF

Market Moves

Precious metal prices spiked higher as the U.S. dollar index (DXY) broke support with a significant drop lower. Stocks began the day higher but closed lower as investors showed nervousness and the S&P 500 index hit resistance. The Nasdaq 100 index (NDX) actually closed lower than the previous day.

The chart below shows how the significant breaks higher by the precious metals are indeed correlated with a break of support by the dollar. This kind of move certainly has the potential to drag the dollar lower and consequently push the metals higher. That possibility of a continued move higher is a significant statement considering the price of Silver has already moved 40 percent higher in the past six weeks. But such a possibility means that if stocks run into resistance, investors can still find opportunity in commodities.

Will Stocks Continue Higher or Hit Resistance?
The chart below displays State Street's S&P 500 index fund (SPY) with a resistance zone defined by the initial drop in late February (when pandemic fears took hold in the market). Yesterday's close was the highest since the pandemic broke. Even though today's move closed slightly higher, it is tempered by a candle pattern similar to a dark-cloud cover. This pattern suggests resistance, and can oftentimes mark a short-term reversal.

It is interesting to recognize just how large the resistance zone is. If the dollar keeps moving lower it will provide mathematical influence for stock prices to go higher. However, if sellers want to take profits and thus push stock prices lower, the dollar movement won't help much. The confirmation of the candle pattern will be important for chart watchers to observe as it plays out tomorrow. It will likely give a clue whether the index will indeed go sideways or not.

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Trade the Falling Dollar with an ETF

Stock traders and investors can participate in gains from the U.S. Dollar's downward trend without having to open a forex account. The ETF industry has created many innovations to take advantage of almost every circumstance in the market. For today's setup, investors might consider looking at the ProShares Ultra Euro ETF (ULE), which is a leveraged ETF that tracks the price of the Euro as compared to the Dollar. The leverage means that if the difference between the currencies changes by one percent, this ETF changes by two percent. For example, today's change amounted to a 1.78% increase in the price of ULE shares.

The Bottom Line

Gold and silver prices jumped to new highs as the U.S. Dollar broke support. Meanwhile, stock prices fell from their open. The Nasdaq 100 closed lower than the day before.