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Keeping An Eye On The Dollar For Stock Direction

 May 09, 2012 09:01 AM
 


Covestor model: Technical Swing

Disclosure: Long WFC, LTD, DG, AIG, DFS

I took a passive stance to let the market consolidate its first-quarter gains, staying mostly in cash, and trading the Direxion Daily Small Cap Bear 3x Shares (TZA).

[Related -JPMorgan Chase & Co. (JPM): Capital Concerns Should Ease In 2014]

I expected a much stronger move to the downside, but stocks turned north during the last April week and prompted me to close my position.

On the upside, various stocks did set up nicely and offered great entry opportunities to go long. My favorite sectors turned out to be Financials and Consumer Discretionary. Therefore, I traded names like American International (AIG) , Discover Financial (DFS) , Wells Fargo (WFC), Limited Brands (LTD) and Dollar General (DG).

[Related -Family Dollar Stores, Inc. (NYSE:FDO) Q1 Earnings Preview: What To Watch?]

Many more stocks looked promising, but it was the beginning of earnings season, and I do not jump into positions right before companies report. There is no edge for individuals in trying to guess how companies will report versus expectations, the outlook, and how the markets will react. Overall, this usually limits the number of stocks I can trade during the beginning of earnings season.

Looking forward, I'm following various interesting developments, which should keep markets volatile. First of all, the greenback is in key position to trigger major moves in other markets. The US Dollar Index has been moving lower in recent weeks and is about to reverse its intermediate term uptrend. The currency recently broke down out of a symmetrical triangle pattern after moving sideways for several weeks. A weak dollar would be bullish for stocks and certain commodities.


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