All major U.S. stock indices closed lower last week with the exception of the small-cap Russell 2000, which gained 1.2%. Recent market weakness has left the Russell and tech-heavy Nasdaq 100 as the only two in positive territory for 2015.

This is actually a subtle positive for the overall market heading into the second quarter, because technology and small-cap issues typically lead. As I said last week: “As long as technology and small-cap issues continue to outperform the broader market, as has been the case thus far this year, I view the recent weakness as a temporary countertrend correction rather than a sustainable decline.”

#-ad_banner-#From a sector standpoint, only health care and financials posted gains last week. Two of the weakest sectors were energy and materials, both of which have been adversely affected by recent strength in the U.S. dollar.

It appears that the greenback has been influencing a lot more than just these two sectors though. My work shows that the currency is currently inversely correlated to a number of commodity prices, including crude oil, copper and the CRB Index, and positively correlated to the U.S. stock market.

Influential U.S. Dollar at a Critical Level

This week’s first chart plots EUR/USD, which is an inverse chart of the value of the dollar versus the euro, weekly since 1980. EUR/USD is testing and slightly edging below its 1.0626 May 1985 major uptrend line, which represents 30-year overhead resistance for the U.S. currency.

Since major inflection points like this one are rarely appreciably and sustainably broken without at least a minor countertrend correction first, I am expecting at least a monthly rebound in this chart as the dollar temporarily weakens against the euro. And a decline in the dollar would be indirectly positive for commodity prices like crude oil and copper.

Stocks Also at an Inflection Point

In the March 2 Market Outlook, I pointed out a bearish non-confirmation according to Dow Theory that warned of some upcoming weakness in the broader market. Since then, the bellwether S&P 500 has declined 2.5% through the end of last week. Despite this, the major indices have managed to remain above key underlying support levels, which keeps their overall positive bias intact.

The next chart, an updated version of one in the Feb. 23 Market Outlook, shows that, after breaking higher from a year of sideways investor indecision, the Russell 2000 successfully tested, held and rebounded from the 1,213 upper boundary of this indecision area last week.

As long as 1,213 continues to loosely contain the index on the downside, my 1,320 upside target remains valid.

Nervous Options Traders Suggest a Rebound is Coming

The next chart is another reason to expect a market rebound between now and the end of the month. It shows that the CBOE Put/Call Ratio is currently at a two-year high, indicating a bearish or defensive extreme by short-term-oriented options traders. As a contrary indicator, such extremes have closely coincided with important near-term bottoms in the S&P 500 in June 2013, August 2014 and October 2014.

This metric — which once again proves the point that investors are typically improperly positioned at important market turning points — suggests favorable conditions for another market rebound to emerge in the next week or so.

Investor Sentiment on Copper Favors Upcoming Strength

Two weeks ago, I discussed an emerging buying opportunity in economically influential copper via Freeport-McMoRan (NYSE: FCX), a mining company with a long and stable positive correlation to copper prices.

Despite a decline in FCX last week, I continue to like this idea for a number of reasons. These include the record bullish position by smart money commercial hedgers in the futures market, the potentially positive influences of a U.S. dollar correction, and the current “least bullish” extreme on copper prices by brokerage and advisory services as displayed in the next chart.

A Market Vane Sentiment Survey shows the collective bullishness of these professional trend followers on copper prices currently retracting from an 11-year least bullish extreme of just 21% bullish, reached in January when copper prices bottomed. 

The two previous instances of this extreme, in May 2004 and December 2008, coincided with major, multiyear bottoms in copper futures. So, despite last week’s weakness in FCX, more intermediate-term metrics continue to suggest favorable conditions for rising copper prices into the summer.

The March pullback in the U.S. stock market has resulted in a test of important underlying support at 1,213 in the market-leading Russell 2000, amid an extreme in the CBOE Put/Call ratio that has historically coincided with near-term market bottoms. These conditions establish a near-term inflection point from which the market’s October 2014 advance should resume if still healthy and intact.

Bigger picture, I am closely watching the dollar’s reaction to a secular overhead resistance level versus the euro, which is currently being tested. The corrective decline in the greenback that I’m expecting should help support economically-sensitive crude oil and copper prices, the latter of which would be an overall positive sign for global economic growth.

This article was originally published on ProfitableTrading.com: Why I’d Bank on a March Rebound While Others are Scared