Weak dollar great for stocks

The rally in the dollar was the chief antagonist to stocks back in May. As the greenback advanced and the forces of deflation grew stronger — from Mitt Romney's rise in the polls to renewed panic in Europe — equity markets took a beating. From a secondary high on May 1 that was only a few points off the highest levels of the year reached the month before, the S&P 500 fell by more than 38%. Over this same period, the dollar rallied to new year-to-date highs.

After a volatile correction, the greenback is back making year-to-date highs. But there is reason to believe that the dollar will find sellers at these levels and again retreat. Selling on Friday prevented the dollar from getting the kind of follow-through to the upside (see chart below), that would have allowed the market to convincingly take out the previous highs from late May. This, combined with signs of waning momentum when comparing current highs to the late May highs, paints a somewhat bearish intermediate picture foThe short-term view looks equally biased in favor of the downside. The past three days of trading, for example, suggest that buyers may have gotten ahead of themselves, taking territory they may not be able to hold. The PowerShares DB US Dollar Index Bullish Fund /quotes/zigman/1502728/quotes/nls/uup UUP -0.43% closed short-term overbought for three days in a row heading into Friday's trading. And from a technical perspective, the evening-star pattern being traced out as of midday on Friday (see below) further indicates that the balance of power has shifted in favor of a weaker greenback rather than a stronger one.

r the dollar.