As The Dollar Inches Into Resistance, Expect A Commodity And Market Bounce

January 30, 2010

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As The Dollar Inches Into Resistance, Expect A Commodity And Market Bounce

01.29.10

The markets have tumbled over the last two weeks giving a sour start to 2010. Many point to the fall as being a result of President Obama’s tough talk on bank regulation, not allowing them to take risks that have been the key driver of profits. The Financial Select Sector SPDR (ETF) (NYSE:XLF) has tumbled in the last two weeks over 7%. Stocks like Goldman Sachs Group, Inc. (NYSE:GS) has tumbled from its the highs on January 7th, 2010 of $179.75 to recent lows of $148.27. While many blame earnings and the Presidents tough talk against Wall Street there is another culprit.

It seems that the real key to the drop on Wall Street is none other than the U.S. Dollar. The dollar has spiked higher over the last few months killing commodity prices. Price of oil had dropped dramatically along with gold. Stocks like Southern Copper Corporation (USA) (NYSE:PCU), Steel Dynamics, Inc. (NASDAQ:STLD) had crashed in the last three weeks. These two stocks have fallen 27% and 25% respectively. In addition, the biggest players in the commodity realm have also seen a major price correction. Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX), each a major component of the DOW have collapsed almost 10%. Being a major part of the DOW, this type of drop has a dramatic effect on the index itself and could be looked as a major portion of the losses in the last two weeks in the markets. The root of the issue all comes back to the dollar.

As the dollar has ripped higher, commodities have fallen. iPath S&P GSCI Crude Oil Total Return (NYSE:OIL) has fallen from $27.22 to $23.44. That is a 14% drop in a mere two weeks. The impact on the markets of this type of fall in commodities is earth shattering.

To find the bottom in this market, the point where this market will get a significant bounce, one must turn to the charts of not oil, not gold, not XOM, CVX, GS or the XLF but to the U.S. Dollar. Everything comes back simply to the dollar. PowerShares DB US Dollar Index Bullish (NYSE:UUP) is closing in on a major resistance area and should spell a pullback. As we know, if the dollar pulls back, commodities will bounce. If commodities bounce, commodity stocks like XOM and CVX will bounce. If those stocks bounce, they will have a direct and major impact on the DOW. The markets will surge.

This level on the dollar is the 200 moving average. It is close to hitting. In fact, the UUP (dollar ETF) is only a dime ($0.10) away. With this resistance point looming, expect the dollar to fall back and a bounce to come into the markets any day. This will most likely only be a short term bounce but a solid one. Enjoy the chart below of the dollar ETF, the UUP and the 200 moving average.