He FOMC has raised the Fed Funds Rate 25 basis points (or 1/4%) at every meeting, since mid-2004, from an accommodative 1% to a possibly neutral 5%. It's widely expected the FOMC will tighten again on June 29th and there's uncertainty if further tightening will take place this year.
The first chart is a five-year weekly chart of SPX to USD (red line and right scale) and SPX (blue line and left scale). The chart shows the SPX to USD ratio and SPX are highly positively correlated, although there's some spurious correlation. The MACD indicator, above the price chart, has a negative divergence and bearish crossover, which may indicate SPX direction.
The second chart is a five-year weekly chart of USD and SPX. The chart shows USD steadily depreciated from early-2002 to late-2004. The circle identifies a USD bullish inverse head & shoulders and the horizontal line is the neckline of that pattern. The MACD indicator, below the price chart, has a positive divergence and may be on the verge of a bullish crossover.
Also, the second chart shows, USD and SPX generally had a positive correlation before 2003, because of the lagged effects of previous monetary easings. However, since mid-2003, the adjustment process of prior easings were effectively completed. So, USD and SPX generally had a negative correlation, while USD bottomed and SPX rallied.
The SPX to USD ratio and USD technical indicators and chart patterns suggest USD will appreciate and SPX will continue the downtrend. If USD rises to the head & shoulders neckline, SPX may fall below 1,200. If USD breaks above the neckline, a greater SPX decline may take place.
The SPX to USD ratio reached an all-time high at 15.6 in May 2006, which is higher than the top at 14.1 in March 2000, when the severe SPX bear market began. There are some SPX bullish indications short-term. However, I suspect, sometime in the August to October period, SPX will fall below 1,200 and perhaps fall well below that level.
Free charts available at www.PeakTrader.com Forum Index Market Forecast section.
Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.
Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.
By Arthur Eckart 
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