Should You be Worried About the Market’s Sell Signal?

U.S. dollar's buy signal was accompanied by a sell from the Nasdaq

By Sam Collins, InvestorPlace Chief Technical Analyst

After a period of relative quiet, the European debt problem took center stage on Monday. Stocks fell as weak German economic data and a failure to organize a European bank union hit the headlines.

U.S. economic numbers were mixed, and the Dow Jones Industrial Average closed at 13,559, off 21 points, the S&P 500 fell 3 points to 1,457, and the Nasdaq was down 19 points to 3,161. The NYSE traded 625 million shares and the Nasdaq crossed 405 million. Decliners led advancers on both exchanges by about 1.4-to-1.

UUP Chart
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Trade of the Day Chart Key

In late October 2011, the U.S. dollar and PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP) had a correction and then rallied through the remainder of the year. This year, following a break to new stock market highs and a correction in the dollar, the buck appears to be showing strength. This inverse relationship of a stronger dollar/weaker stock market has reappeared. Could the markets do a replay of last year’s fourth quarter?

On the chart above, note Monday’s intermediate-term buy signal from the MACD indicator.

Nasdaq Chart
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The Nasdaq lost momentum Monday, gapping down to just above the breakout at 3,122, which is, of course, its first line of support. Like the U.S. dollar, Nasdaq’s chart has a MACD signal, but since there is usually an inverse relationship between the buck and stocks, this is a sell signal versus the buy signal for the dollar.

Conclusion: How serious are these technical signals? When the world rushes to the dollar, commodities and stocks usually fall. But last year’s dollar rally didn’t produce much resistance in stocks mainly because the July/August correction had done so much damage, and stocks began October in an already oversold condition.

This year a stock market correction could be worse, but the many levels of support in all of the indices (which resulted from the six-month “V” pattern beginning in March 2012 and the recent breakout) could act as a block against an extended decline. Thus, the impact of a stronger dollar, like last year, may not be serious.

My guess is that the stronger dollar will have a more negative impact on oil and perhaps even metals. As for stocks, buy into any weakness in the stock market.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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