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S&P Rally Fails to Break through Last Week's High

James Hyerczyk from ForexHound.com at 11/23/09


Despite the weaker Dollar and greater demand for higher risk assets, the December E-mini S&P 500 failed to break through last week’s high at 1112.25, stopping at 1111.50. The December E-mini NASDAQ also failed to make a new high. The December E-mini Dow did rally to a new high for the year, creating a divergence between the three contracts. At this time the divergence is insignificant unless these markets post daily closing price reversal tops.

The rally in the stock indices has been weakening since the early morning surge. The top in the markets coincided with the bottom in the Dollar which was triggered by a better than expected U.S. existing home sales report.

U.S. Treasury markets are trading lower because of the stronger stock markets. Losses have been limited, however, because of the mid-session sell-off in the equity markets and other higher risk assets. December Treasury Bonds and Notes have retraced about 50% of this morning’s decline. Volume has been light because of holiday shortened action this week.

After early morning weakness plunged the Dollar toward last week’s low at 74.75, shorts began covering their positions when the U.S. reported better than expected existing home sales.

The Dollar was trading sharply lower overnight and had retraced more than 50% of last week’s rally following bearish comments over the weekend by St. Louis Fed President James Bullard who restated his case for extending the central bank’s mortgage buyback program. Bullard said, “unemployment is high, and labor markets are lagging.” This comment triggered a sell-off in the Dollar because it strongly supported the Fed’s stance that interest rates would remain low for a “prolonged period”.

The December Euro once again took a run at the psychological resistance at $1.5000 before sellers stepped in. The rally in the Euro is being triggered by Bullard’s bearish Dollar comments and last Friday’s news that European Central Bank would take steps to make it tougher for banks to make loans.

Traders are starting to look at the fundamentals which drive currency markets, namely the interest rate differential. If the ECB is getting ready to exit its stimulus programs then this is a sign that interest rates will remain at 1% and possibly move higher by early next year. This would make the Euro a more attractive investment than the Dollar because the Fed is not set to raise interest rates until at least mid-2010.

This morning’s U.S. existing home sales report came out better than expected. This stopped the decline in the Dollar as it indicated the economy may be stronger than previously thought.

This friendly report also triggered selling in the December British Pound, December Canadian Dollar, December Swiss Franc, and December Japanese Yen as traders lightened up long positions.

Although this morning’s turnaround is not a change in trend, it is making speculators think twice about aggressively shorting the Dollar. Technically, last week’s closing price reversal in the Dollar’s futures index is still intact, but it is going to take a rally through last week’s high to confirm that a short-term bottom has been formed.

December Gold retreated after posting a new all-time high. The weaker Dollar helped support the rally but Russian central bank buying was considered to be the main driving force behind the rally.

January Crude Oil is trading better, but well off the high. Geopolitical news is helping to provide some support following the start of Iranian war games. Higher equity prices and the lower Dollar are considered to be the main contributors to today’s strength. The bearish supply/demand picture is helping to limit gains.

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