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Equities Manage to Hold on to Weekly Gains despite Stronger Dollar

James Hyerczyk from ForexHound.com at 12/05/09


Shortly after the release of the U.S. Employment Report, the December E-mini S&P 500 rallied to a new high for the year at 1119.00 just short of a major 50% level at 1122.00.  The subsequent break from 1119.00 found support at a short-term retracement zone at 1098.50 to 1093.50.  Buyers came in on the break to drive the market higher into the close, negating all possibilities of a daily or weekly reversal top.


The December E-mini NASDAQ also made a new high before selling off.  1779.00 to 1770.25 is new intraday support.  The close near the high indicates a follow-through rally is likely next week.


The December E-mini Dow eked out a new high at 10509 before getting hit by selling pressure.  New intraday support was established at 10300.  The strong close following the sharp intraday sell-off is a sign that traders are still willing to buy the dips.


Yields rose sending March Treasury Bonds and March Treasury Notes sharply lower following the better than expected U.S. Unemployment Report.  Investors are adjusting positions to accommodate the possibility that the Fed will begin pulling stimulus and raising interest rates sooner than previously estimated.  Additional pressure could be seen next week because of the Treasury’s $74 billion auction.  There is no doubt that investors will be asking for higher yields for this new paper.


On Friday the U.S. Dollar posted its biggest gain in weeks against a basket of currencies.  The strong up move was triggered by a better than expected Non-Farm Payrolls Report which showed a decrease in the unemployment rate from 10.2% to 10%.  The pace of job losses also declined and there was a revision to the better in October.


Traders bought the Dollar on the thought the Fed would begin reducing stimulus and raising interest rates sooner than previously estimated. 


Technically, the move in the Dollar was only one week up, but it did lay the groundwork for a further rally next week by taking out last week’s high at 75.66.  The weekly chart is the one to watch for the best change in trend indicator.  At this time the main trend will turn up when this index crosses the November top at 77.50.


The short-term range is 77.50 to 74.27.  The retracement zone of this range at 75.89 to 76.27 is near-term resistance.  We’ve seen this move before twice previously over the past 6 months.  In June the index rallied from 79.12 to 82.25 or 3.13 points.  In August the index rallied 77.80 to 79.97 or 2.27.  This means that the current rally has to exceed both 76.54 and 77.40 before overbalancing the previous rallies. Basically, the shorts have to sweat until 77.50 is taken out.


The December Euro finished the week lower.  The possibility of the Fed raising rates before the European Central Bank triggered the selling pressure in the Euro.  The last high at 1.5144 has not been confirmed yet on the weekly chart.  The main trend will turn down on the weekly chart when 1.4624 is violated.  Earlier this week, the ECB voted to leave interest rates unchanged.  It also announced the end to its stimulus packages.  Additional selling pressure hit this market when ECB President Trichet said he wanted to see a stronger Dollar.


The December British Pound closed lower for the week. The current daily chart pattern suggests the formation of a secondary lower top at 1.6720.  Next week the Bank of England meets to discuss monetary policy.  Look for interest rates to remain unchanged while the BoE leaves its asset buyback program intact. Today’s employment report signals the Fed may raise rates before the BoE.


The reversal of carry trade positions helped send the Dollar higher versus the Japanese Yen.  The friendly employment numbers forced traders to buy U.S. Dollars to pay back borrowed funds and short borrowed Japanese Yen.  Earlier in the week, the Bank of Japan helped put in the top in the Japanese Yen when it announced another stimulus plan.  Talk of a possible intervention also pressured the Yen.


Last week’s closing price reversal top in the December Swiss Franc froze the market for most of this week.  This top was triggered by an intervention by the Swiss National Bank.  Today’s break was a confirmation of that reversal top.  The charts indicate that a breakout under .9782 is possible next week.  The sharp break in gold also helped fuel the rally in the Dollar against the Swiss Franc.


It was a struggle most of the day, but the U.S. Dollar managed to close higher for the day against the U.S. Dollar. A bullish Canadian employment report negated the good news from the U.S. government regarding its employment, but buying forces were able to overcome the selling pressure late in the trading session.  Another bearish factor is the close below a key retracement zone at .9505 to .9574.  Downside momentum could take this currency pair to .9317 - .9301 next week.


The stronger Dollar helped drive February Gold lower for the week.  The weekly closing price reversal often leads to a 2 to 3 week break if there is follow-through weakness.  The current chart formation suggests a minimum break to $1107.40 to $1079.00 is likely over the short-run.


March Crude Oil finished the week lower but inside of last week’s range.  This pattern suggests heavy volatility next week.  Falling equity prices, a stronger Dollar and bearish supply/demand fundamentals could put huge downside pressure on this market with a minimum downside target of 75.53 to 73.63.


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