Dollar to Fuel Year-End Stock Rally

11/28/2011 9:52 am EST

Focus: FOREX

Look for a short-term top in the US dollar index to help support a traditional “Santa Claus rally” unless more bad news from the Eurozone sparks fears and a new wave of selling.

Thus far in 2011, the overall stock market movement has been much different from what we had in 2010. This year we have seen nothing but sideways to lower prices with wild price swings on a day-to-day basis. There just haven't been any really solid trends to take advantage of this year.

Instead, we had to actively trade the oversold dips and sell into the overbought rallies to just pull money out of the market on a monthly basis. Last year we saw three major rallies that lasted several months, making it easy for anyone who bought into the trend to make money if they managed their trades properly.

Looking forward to 2012, it looks as though we are going to see some major changes unfold globally that will change the way we do things live our lives. Unfortunately, it’s a very negative outlook, but I do have hope that something will be done to preserve our somewhat normal lifestyles.

I’m not one to talk doom and gloom because there are enough of those guys out there already, so let’s stick with the charts and focus on what is unfolding now and how to take advantage of it.

The charts below show what I feel is likely to happen going into the new year if we don’t get any major headline news in Europe that triggers another selloff.

Intermarket Analysis

There are a lot of different things unfolding within stocks, commodities, currencies, and bonds right now, and it is important to know that investments are interconnected in some way. For example, if one investment moves sharply in one direction, it will have an effect on other investment classes.

My eye is focused on the US dollar index, which has recently had a strong run up in price. For the past couple years, we have seen stocks fall when the dollar moves up. So with the dollar index now trading at a key resistance level, we should see the dollar top out for a few weeks and spark a Christmas rally into year end. After that, all bets are off and we will re-analyze.

Click to Enlarge

On the flip side of things, if Europe comes out with major negative headline news, we could see the dollar index continue its rally and break through this resistance level.

If the dollar moves higher from here, we could easily see a multi-month run up in the dollar. You do not want to be long stocks if this happens. Instead, get short stocks and hold on tight.

By Chris Vermeulen, trader, writer for The Gold and Oil Guy

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