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Good Morning. This is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Wednesday December 16, 2009.
The inverse correlation between the U.S. dollar and stocks is back in play Tuesday. Stock dropped and the greenback rallied as the PPI figures were higher than expected, while the Empire Manufacturing survey was weaker than expected.
Renewed support for the U.S. dollar drove the Dollar Index to a fresh two-month high, up 0.7%. As a result, the PowerShares DB U.S. Dollar Index Bullish (UUP) added 0.7% to close at 22.79. This, as a matter of fact, had helped confirm the validity of the “test of resistance at 23” scenario that we’ve traced out in our November 23 Market Outlook when we wrote that: “UUP rebounded nicely off support at the bottom of its short-term trading range. Money Flow measure remains positive, signals accumulation. So it seems to us that this rally could take UUP to 23.”
The graphics below are from our “U.S. Market ETF Trading Map”, which shows the Money Flow measure and trading ranges for UUP and the S&P 500 index. As shown, the light-blue shading represents the short-term trading range. A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).
Chart 1.1 – PowerShares DB U.S. Dollar Index Bullish (daily).
As shown, UUP moved up to test resistance at 23. This is a tough overhead resistance with the confluence of the August low and October-November highs. A sustain breakout above that level will break the series of bearish lower highs trading patterns going back to early January and could trigger a massive short-covering rally, which would eventually push UUP directly into the high 23s area, or last December low. The Money Flow measure also strengthens the bullish case as it surged to new high today, signals heavy accumulation; though, to be fair, that could include some short-covering activities ahead of Wednesday FOMC announcement. Support is at 22.48, or the white line in the chart. A close below that level will resume recent decline and a test of 22, or the bottom of its short-term trading range, will most likely ensue.
After all, the green back has been the dog wagging its stock market tail. Renewed buying interest in the U.S. dollar had put a cap on stock market rally. After closing at new 14-month high Monday, the S&P 500 index gave back all of previous session gain and closed near its intraday low.
Chart 1.2 – S&P 500 index (daily).
It seems to us that the index is in a holding pattern as market participants are waiting for the FOMC statement, which will be released tomorrow afternoon. As you can see, the S&P 500 index is currently basing sideway near the top of its short-term trading range. Money Flow measure dropped a bit but still holds above the zero line. The action is neither bullish nor bearish. So do not read a lot into it. Immediate support is at 1100. A decline below that level will put 1080, or the bottom of the 5-week trading range, back into view. Immediate resistance is at 1120. A sustain breakout above that level will opening up for a test of 1150, or the 50% Fibonacci retracement of the 2007 to 2009 bear market down-leg.
In summary, stocks appear to be caught in a holding pattern ahead of Wednesday’s FOMC announcement. Right now the most important thing to look for is the November high on the U.S. dollar. Given the recent inverse correlation between the dollar and stocks, an upside breakout above that level is a negative sign going forward for stocks because, after all, the green back has been the dog wagging its stock market tail.
Thanks and Good Trading!
(By: Michelle Mai for Capital Essence)
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