Risk Aversion and the Dollar-Dow Connection

If yesterday’s Dow Jones pullback could have been used as an indication to the risk aversion seen today, then I feel traders would have much more aggressively shorted the EUR/USD and the AUD/USD earlier in the day and as Europe and the U.K. opened. I don’t think it was that obvious and the evidence can be seen in the sharp sell-off in equities today. In my opinion, the dollar is the big beneficiary of the equities weakness as dollar bulls are finally unconvincingly trading above not only the October highs but also 79.00 – the major psychological level that we have not been above since September 28.

With those notable about the pullback in the Dow Jones is the fact, I believe, that in just a single session uptrend on the daily time frame may be broken as well as the 11000 level. Continued risk aversion could propel the U.S. Dollar Index towards the 80.00 decade level. I feel the challenge is not in recognizing the dollar’s momentum, but in determining whether or not in uptrend will ensue. This is where transitional markets can be account killers. In my opinion, do not automatically assume that a broken trend in one direction equates to the beginning of the trend in the opposite direction. There is still the potential for daily time frame charts like the EUR/USD, AUD/USD, USD/CHF and USD/JPY to continue to range and not necessarily to trend.

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