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Mixed results in the early going

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The major market averages are rather mixed this morning as it looks like traders didn't get any type of break that may have been anticipated from yesterday.

One thing I was keeping a very watchful eye on this morning was some type of break lower in the US Dollar as depicted by the US Dollar Index (dx00y) $106.05 +0.37%, but that break lower didn't happen and that looks to have put a bid under the broader market averages this morning.

The "lone sufferer" of the firming U.S. Dollar this morning has been gold stocks as the Gold/Silver Index (XAU.X) 74.82 -4.02% gives back a little more than 1/2 of yesterday's gains.

Yesterday, I made some adjustments to my US Dollar Index Chart (dx00y) to give traders and investors a look at potential impact of further weakening or renewed strength in the US Dollar as it relates to equities. My "new" retracement honors the two key levels I've identified that could be market moving should the levels be broken. By "rolling down" my retracement in the DX00Y, it gives us some idea of what to look for in the S&P 500 (SPX.X) 946.48 as it relates to the US Dollar Index.

US Dollar Index Chart - Weekly Interval

One reason I think we're seeing the major market averages bounce around this morning into positive and negative territory is that there are a lot of institutional trading scenarios based on the U.S. Dollar. The US$ didn't break the $105.75 this morning, and that probably removed some short-term bearish bias to things.

S&P 500 Index Chart - Weekly Interval

Just as the US Dollar is flirting with a support level, the above retracement from a February 1997 relative high to the all-time high shows the S&P 500 (SPX.X) flirting at a potential level of technical support.

With investor confidence sinking, the S&P 500 (SPX.X) sure hints that stock lack buyers and the S&P 500 appears to be discounting that this. It's notable that while the US Dollar Index (dx00y) has fallen about 12.5% since the beginning of the year, the S&P 500 decline from 1,175 to current levels of 950 represents a 19% decline.

Why the difference? I think that while the US$ represents foreign investor interest in the U.S. currency/Treasury/stock markets, the U.S. Treasury Bond Market is a good indicator of US investor sentiment/confidence. Note: I'm not talking about CONSUMER confidence, but INVESTOR confidence here.

The benchmark 10-year YIELD ($TNX.X) was YIELDING around 5.175% earlier this year, but as investor confidence weakened due to corporate shenanigans, money has come back into Treasuries to seek out some safety and the 10-year YIELD has fallen to 4.717%.

While the US$ is getting a bounce today, Treasuries are seeing buying, thus putting some downside pressure on stocks that are already deprived of cash that would drive prices higher.

As such, I'm expecting equity bears to continue to pressure stocks and try and push the S&P 500 Index (SPX.X) to 820. Any weakness in the US$ would help that type of cause.

However, a break higher in the US$ above the 108.50 level combined with a break higher in the SPX above 1,000 should get a bear's attention.

Jeff Bailey
Senior Market Technician
Option Investor

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