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The Inverse Dollar/S&P 500 Relationship

ByChris Vermeulen, TheStreet.com Contributor

NEW YORK (TheStreet) -- So far this week we've seen fear creep into the equities market. On Wednesday, we started to see fear reach a level that tells me to start looking for the market to bottom. I do follow a few other charts and indicators which warn me of a possible trend reversal before it takes place, but the U.S. dollar and selling volume are key. As we all know, when the market is trying to top and roll over it tends to be more of a process than an event of a couple of days. It's this lengthy topping process with a lot of choppy price action that sucks traders into a position much too early or shakes them out of a position before the market does what was anticipated. On the flip side, bottoming is more of an event because it tends to happen after a strong wave of panic selling. Fear is the most powerful force in the market (other than the Federal Reserve/manipulators, but that's another topic). That being said, when you know what to look for in bottoms you can generally see the market starting to bottom and prepare for it. The charts of the U.S. dollar index and the SPDR S&P 500 ETF clearly show the inverse relationship they have. Right now it seems everything is directly connected with the dollar; it has been like that for most of the year. I'll note that it's not normally this clear. Anyway, the dollar is currently trading at resistance which means there is a good chance it will turn back down. So if the dollar drops, it should boost the SPY (equities market) and put in a bottom for stocks. Looking at the lower chart of the SPY you can see that recent prices have dropped down to a support zone. The important thing to note here is how selling volume is ramping up. To me, this means more traders are getting worried and are cutting their losses or locking in gains before it gets worse. We typically see panic selling enter the market near the end of pullbacks. Just like in a bull market in which the retail trader is the last to buy before the market falls, it's the same but flipped in a downtrend. The retail trader is the last to panic and sell out of his position before the market bounces or rallies. The equities market currently looks to be showing signs that a bottom is nearing. Over the next session or two the rest of this equation should come to light.

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