Using the S&P 500 Index to Determine Our USD Trades [Bonus Lesson]

The reality is if the stock market is going up then the USD is going to end up losing strength and if the stock market is going down then the USD will gain strength. Let me briefly explain to you the reason why this is the case. If the stock market is doing well then it's going to give investors the confidence to head into some more riskier assets and currencies which we refer to as a risk on sentiment since investors are willing to take more risk. The USD is considered a safe haven currency and investors will jump to it if there's a lot of doubt or markets aren't looking too good which is referred to as risk off sentiment. If investors are willing to take more risk and jump to riskier assets then it means that they're likely going to sell off their USD in order to get into more riskier pairs. If investors start selling off USD what's going to happen to the strength of the USD? That's right it's going to get weaker. This is the reason why the stock market and the USD have a inverse relationship with each other.

Knowing this we should be able to look at the S&P 500 Index in order to try to get an idea of what the USD pairs might do in the near future. This is where a lot of fundamentals come into play which is why I always recommend that every single trader sit down and read the news for about an hour every single day since it could give you a slight edge in the market.

Unemployment Rate: Looking at the U-6 unemployment rates we can see that the current unemployment has really spiked in the recent months due to the pandemic and it still hasn't really shown any signs of coming down yet which is definitely going to play an impact when the government might have to decrease grants and funding to businesses to keep employees employed.

U-6 Unemployment Rate

You also need to keep in mind that the government can only provide companies with so much money to keep people employed before they have to start backing away a bit. That point might be here soon and once that point comes then companies have one of two options: they can either continue to pay employees which is definitely going to hurt their profits or they can cut jobs which again isn't going to look good for the company since it's going to tell investors that the company isn't doing too hot. If investors start backing away from companies then the stock prices drop and that's going to be reflected in the S&P 500.

Reopening The Country?: The US definitely wants to reopen and I'm not going to start a debate here about whether that's a good idea or a bad idea but I just want to state the numbers. Since states started to reopen guess what happened? Twenty-one state reported a jump in the number of cases of the Coronavirus. This could be a sign that the country isn't ready to reopen and companies are definitely aware of the fact. Just look at Apple and what they did. After viewing the increase in cases, Apple made the decision to close 11 of their reopened stores.

The Feds: The Federal Reserve has been really doing its best in order to keep liquidity up but the question is how long can they maintain it. Just take a look at the Balance Sheets of the Federal Reserve for a while and start comparing the numbers from recent balance sheets. It's becoming quite evident that the Federal Reserve's Balance Sheet looks like it's going down which means they won't be able to keep adding liquidity into the stock market in order to keep it going higher. Once the liquidity they add starts to decrease drastically then we could begin to see the stock market drop which will drive the USD up. To top things off our GDP isn't also doing too hot right which is also adding onto the reasons of why there might be a big drop off in the stock market soon.

Technicals:

There's definitely a couple technical signs telling me that S&P 500 Index is looking like it's getting ready for a drop off before proceeding to go higher.

Elliott Wave 1

In terms of Elliott Waves, to each is their own and everybody draws them differently. The S&P 500 looks like it just completed the impulse move of an Elliott Wave. After an impulse move of an Elliott Wave there's always going to be a corrective phase described by the letters A, B, and C. If the B leg is completed then we could see a drop off of the S&P 500 Index to around the 2800 area in order to complete the corrective phase before maybe continuing up if the Feds are able to keep pushing and the fundamentals begin to support them. This is just one Elliott Wave but I see another which is also saying that we might see a much larger drop off.

Elliott Wave 2

This Elliott Wave stretches further back and I'm more leaning towards this Elliott Wave since if you look at volume (green and red lines at bottom of the screen) you can see that it's really beginning to drop off and when you combine that with the Feds money dropping I think a large drop in the S&P 500 is going to happen in the near future.

However there's one sign that's currently making me a bit nervous about this analysis and that's the Bullish Hidden Divergence.

Hidden Divergence

Looking at the 4 Hour chart there's some pretty clear hidden divergence since price made a higher low but the RSI made a lower low which could be an indication that there might be a trend continuation and the S&P 500 Index could continue to push higher which might mean I would have to reconsider my Elliott Waves.

Well now let's head back to the USD shall we. With the S&P 500 looking like it's going to drop, I feel it'll create a risk off sentiment for investors where they'll jump back to the safe haven currencies. This should definitely increase the strength of the USD so you probably will want to keep your eye on the S&P 500 Index and some of the USD pairs since they might have some large moves in the near future and I want to make sure that you're on the right side of the moves. This is just my take on what I think will happen according to the information I have. If you completely disagree with me and you think the S&P 500 and stock market will continue their rally up then let me know as I would love to get some perspectives from others. I hope you enjoyed that little lesson on cross analysis and how you can use other resources in order to try to predict what a currency will do in the near future.