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Stock Indices in Position to Form Weekly Reversal Top

James Hyerczyk from ForexHound.com at 11/20/09


The stronger Dollar is pressuring equity and commodity prices today. Some traders believe this is the start of a change in trend in higher risk markets while other feel this is just early end-of-the-year liquidation. Comments from Fed Chairman Bernanke and European Central Bank President Trichet have put the Dollar on the radar which is making traders uncomfortable about holding aggressive short-positions.

The three major stock indices are in a position to post weekly reversal tops. This could lead to a start of a 2 to 3 week correction. A close under 1091.50 will form a reversal top in the December E-mini S&P 500 market. The December E-mini Dow needs to close under 10242 and the December E-mini NASDAQ will form a reversal on a close under 1799.25. Based on his analysis, the Dow is the strongest contract at this time.

Treasury futures gave up earlier gains and are now trading slightly lower. The inability to maintain the downside momentum in the equity markets may have led to early profit-taking. If equity markets break through to new lows for the day, then look for money to flow back into the Treasuries, thereby lowering yields.

The U.S. Dollar is up sharply against most major currency as investors continue to cut exposure to higher risk and higher yielding assets. Some traders are calling this the start of a major bottom. Others feel that this is end-of-the-year liquidation and profit-taking after a prolonged move down.

It is also possible that this is the start of a short-squeeze which could lead to a massive short-covering rally. Over the past few months traders have jumped onboard the “short Dollar” train because lower interest rates continued to point toward a lower Dollar over the long run. Short-term oversold technical indicators may have caught many of these traders by surprise. The absence of major economic reports in the U.S. and Europe this week may have created overconfidence in traders who were caught off guard by comments from the Fed’s Bernanke and the European Central Bank’s Trichet.

Despite the stronger Dollar, December Gold is trading higher at the mid-session. The inability to attract new sellers when the market approached yesterday’s low at $1030.00 early in the session has triggered a strong short-covering rally.

The stronger Dollar and weaker equity markets is pressuring January Crude Oil. Bullish speculators who have been supporting this market lately may have thrown in the towel on the long side. Comments from Bernanke earlier in the week suggest a weaker economy. This should lead to less demand for energy products.

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