Intermarket Analysis:
DXY
Re-visiting my “Intermarket Analysis” book review, I was reminded that if the US dollar falls, then this typically causes a rise in inflation as people will have more dollars to spend.
A rise in inflation often results in a rising stock and commodity market as people with more dollars are now competing (spending more) to obtain the same goods and services.
As we can see within the chart above, I am expecting the US dollar to continue declining for the next week or so to the upcoming major support level.
In theory, by continuing to fall, this should increase the odds that the broader US market will not decline greatly.
However, the next major support level also merges with a yearly diagonal trend line.
The result is that this increases the odds of DXY experiencing a strong rally to the upside.
Learning Point
Because I focus on trading the daily timeframe (swing trading), it means that I do not have to worry too much about the larger Intermarket cycles.
The reason is that the most probable technical patterns often play out, in the short-term, before the larger cycles play out, or kick back into full effect.
That said, there are still many short-term Intermarket relationships that I have to pay attention to, such as when the US10Y rises, it tends to cause the overall stock market to fall.
In other words, a drop in bond prices usually coincides with a fall in the stock market.
In terms of commodities, I usually trade US Oil and Natural Gas.
At the moments, Oil and Natural Gas have been declining, but Gold has been rising due to the poor state of the current economy.
This is because the large investors are having to spread their capital as it is risk off in terms of the broader market (money being withdrawn from riskier investments).
Also, it is worth mentioning that when the US10Y has been highly correlated with the US dollar. Better put, when the US10Y rises and falls so does the dollar.
Therefore, carrying out this review allowed me to acknowledge that I am more attuned to the Intermarket relationships within the markets than I previously realised.
Next Action
- Continue to monitor the DXY everyday and prepare to scale into a UUP long when the price action reaches the upcoming major support level.
- Re-visit your “Intermarket Analysis” book review.
