We have much to do this evening. First we will discuss the SPY and e-mini and then move on to the dollar index (dx), euro and gold. The SPY closed higher on a smaller range with less volume than the reversal day on Thursday. It edged up against support /resistance from the week of December 22,2008. Although demand is still ascendant, the smaller range tells us it is not as dominant as Thursday and the smaller volume indicates there is less of it. Bumping up against resistance the ease of upward movement suffered. As soon as we bounced off the support around 813 we ran into resistance. Intraday the market opened higher and immediately ran into steady selling. It fell easily until the spring at 11:25 and a weak rally began at 11:30. Demand was sufficient to move prices higher through minor resistance at 11:55 and 12:40. Price and volume spike at 13:10 and from the high of this bar the market battles upward with higher lows and highs until the close. Volume is relatively high indicating good supply but the demand does not waver either. As a result the gain from the top of the 13:10 bar to the top of this wave so far is a meager five points.This looks like absorption but we do not know yet whether it will be successful. Given the weakness so far this year and the continuing weakness in the financial stocks, which have led the market down, it is not yet time to change our bearish posture. Given supply and demand are balanced, leadership decides.
The DX as mentioned earlier upthrusted its retracement rally high of 1/6 on 1/15 and closed in the middle of a narrower range. This indication of supply and diminished demand was confirmed with the gap down opening and close beneath the previous 3 days' closes. In addition the up trendline was nicked in a warning shot but it held. If prices do not begin falling immediately, I would expect further confirmation of waning demand.
The euro as mentioned earlier retreated to its point of breaking out where it found support and even made a small spring just to confirm its strength. It has since rallied through the axis line that restrained upward progress at 1.3285 and has broken its down sloping trendline.
Gold also had a spring and has rallied through its support/ resistance at 829.80. Unlike the euro, it has not penetrated its down sloping trendline.
While it is not necessarily the purpose of this blog to make political or economic predictions, at this point I cannot resist. I have already mentioned that the record range in the dollar index for the month of December has serious implications. The Fed assumes we are in a banking and liquidity crisis, not a crisis of the dollar or external funding. At the same time educated opinion is beginning to see this crisis as a result of "global imbalances." Every other financial crisis since the second world was has resulted in a currency crisis and capital flight. Why shouldn't ours? How could a crisis caused by "global imbalances" not result in a crisis of the dollar and external funding? The chart of the dollar index, with the recent failure of its retracement rally supports these possibilities. 2009 will be the year of the Dollar, in my opinion.
