Global Currency Markets React to Prospects of Gridlock
Any political events that could curb spending, stop printing will be bullish for the dollar.
The S&P 500 Large Cap Index ($SPX.X) (130-minute chart):
The trend line shown above has now served as a springboard twice for the S&P. With today's negative tape, monitor this line carefully. A close below it will quickly take the index to 1120, and quite possibly lead to a test of the 75-day moving average (now below 1100).
Market Internals: NYSE
(Figures are rounded)
Critical Market Components (With ETF Proxies)
S&P 500 (SPY): Significant resistance remains at 1146 on a monthly closing basis. Support for the S&P comes in at the short-term uptrend line at approximately 1136-1137. Longer-term support is at the 75-day moving average at 1091.73. The SPY has corresponding support levels of 113.50 and 109.81 and resistance comes in right at current levels at 115.08.
NASDAQ (QQQQ): Critical monthly support for the NASDAQ remains at 2271. Resistance for the NASDAQ comes into play just above current levels at 2331 (March 2007 lows) and 2339.90 just above that level. The QQQQ's have support at 45.00-45.75 and resistance in the 48 area.
Dow Jones Industrials (DIA): Support remains at the breakout point of 10,507 with 10,450 providing additional support below that; resistance comes into play at 11,000. For the DIA, resistance comes in at 111; initial support is at 105.
10-Year US Treasury Yield (TLT used here as a proxy for longer-dated bonds): Resistance for rates on the 10-year Treasury continues to be the 3.8% to 3.9% range and support is at 3.6%. The extreme levels on the 10-year yield translate to support for TLT at 87.56 and resistance at 91.31.
Commodity ETF (DBC): The DBC has resistance at 25 and support at 24.
US Dollar Index (DXY and UUP): The DXY continues to have important support at 76.73. Resistance comes in at 78.33 with the next level above that all the way up at around 80. The support for UUP, the ETF proxy for a rising dollar is at 22.65, while 23.20 is first resistance.
Semiconductor Index (SOX and SMH): The SOX has monthly closing resistance at 366.52. The first support comes in at the horizontal line at 332.11. The next meaningful resistance comes in at 384.28 (bottom of first wave lower from 7/21/2006). Resistance for the SMH fund comes in at 28.72, while support is at 26.13.
Bank Index (BKX and KBE): The BKX seems poised to test the 52-week high at 49.28. The broken resistance at 44.82 now becomes support. The KBE exchange-traded fund has support and resistance at 22.17 and 24.44, respectively.
Crude Oil (USO): Short-term support comes in at 77.06 -- which is the spike low from yesterday. First resistance comes in at 80.53. USO resistance comes in at around 40, while support is at 38.03.
Gold (GLD): Gold has important resistance at the 1145-1150 area (which is a combination of the underbelly of the previous uptrend line as well as horizontal line resistance). Major support comes in at 1086 and 1044 respectively. Support and resistance for GLD translates to 106.17 and 113.59, respectively.
Chart of the Day: The US Dollar Index ($DXY)
The US dollar had been range-bound for weeks before softening last week and trading down to important short-term support at 76.73. Since testing that support on consecutive days last Wednesday and Thursday, the dollar has been very strong. Early Tuesday morning during the European trading sessions, the DXY tacked onto Friday's gains in the first of two major thrusts higher. The dollar then treaded water during normal trading hours in the US. Then, once the results of the Massachusetts special senatorial election began coming in, the DXY exploded higher again. That strength has continued into this morning. At 78.20, the DXY is up 2% from last week's lows -- a big move in currencies.
An obvious conclusion that can be drawn from the move in the dollar is that global currency markets are reacting to the prospects of gridlock, or at the very least a check on Democrat-controlled executive and legislative branches. Any political events seen to have the potential to curb spending, stop printing, and/or increase growth will be bullish for the dollar.
Be positioned for further dollar strength. Some options include currency crosses, being long the UUP exchange-traded fund, or shorting large-cap US equity positions based on the anticipated negative reaction to a rising dollar.
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