To quote the A-Team, I love it when a plan comes together. As I mentioned in this prior post, I thought that the dollar, which seems to have a strong correlation with the VIX at the moment, was reaching support. I expected that the S&P500 would, in the event of the dollar reversal sell-off (or thinking about it the other way, if the S&P500 reversed, the dollar would rebound – correlation ain’t causation!).
And that is what happened – let’s take a look at the dollar bounce right at support. I would put a target at roughly around the top of the downward channel I’ve drawn out here:
And here’s the corresponding sell-off in the S&P500:
And as I said, I felt that unless the lower channel of the S&P500 (shown on this 120m chart) was busted, we could see a bounce off of that as people who have been on the sidelines try and get in – and that happened as well.
The key question from here is this: does the S&P now head down further? If the dollar keeps rising, will we continue to see the negative correlation? I’m keeping a close eye on it. To me the S&P has been very weak in the past couple of days – starting strong and then selling off. Might smart money be heading out the door?
It generally never works this well or straightforwardly – but I hope this gives people some ideas for how to look at trading opportunities in the future.
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