Dollar weakness driving STI higher
The Dollar continues to weaken and the S&P 500 indicates that momentum is
pushing higher again. The STI is likely to take the lead of the S&P 500 and trade
higher as well. The trading of the STI might be more muted due to the range that it is
in, and will probably advance and pause at each subsequent resistance level stated
in the report below.
S&P 500, Daily, 6 November 2009
We previously brought up that there is support in the 1040 region in addition to the
short term trend line. In the past week the S&P 500 has managed to form a shortterm
intra-day base in this region and push higher. The S&P 500 has also overcome
heavy resistance in the 1050 region, which is a sign of underlying strength. 1050
should now act as support.
Friday's (6Nov09) close was at the 1069 level, just short of resistance at 1070. The
next resistance is at 1080, and then the 1100 mark.
S&P 500, 1hour, 6 November 2009
The 1hour chart above shows the short term base that formed in the 1040 region.
Price has pushed towards the 1070 region as mentioned. Price action in the 1hour
chart has slowed down upon approaching the 1070 to 1075 region, indicating some
hesitation.
We will have to see how the S&P 500 reacts to this level. As mentioned above, if
price pushes past 1070, there is resistance at 1080 and then the 1100 mark.
STI, Weekly, 6 November 2009
The STI continues to be stuck in a wide trading range with numerous support and
resistance levels on either side. Sentiment seems to lean strongly towards caution
rather than optimism with 'sell on strength' being the general mindset at this point in
time. This type of sentiment also tends to lead to short-term trading and quick profit
taking which perpetuates this type of choppy price action.
Despite this, the STI still generally tracks the directional movement of the S&P 500.
Should the S&P 500 continue to trade higher, the STI is likely climb as well and test
resistance levels in a stair-step manner with the 2680 then 2700 levels being the
closest upside targets.
As of this writing price is trading at 2670 and using 2660 as support. Subsequent
resistance levels are 2700, 2723, 2739.
The range of the week before, 2605 (low) and 2723 (high) should act as short term
breakout levels. Key support continues to be at the 2560 to 2580 levels.
Dollar Index, Daily, 6 November 2009
The Dollar was at a small cross road last week and we outlined potential scenarios
for both a stronger and weaker Dollar.
The case for the weaker Dollar has unfolded. This, in conjunction with a short term
base in the S&P 500 is likely the reason why the S&P 500 has pushed higher.
Currently, the Dollar is resting on the 75.50 level, which is a relatively minor support
zone. Short term momentum is biased to the downside with support at 75.25 and key
support at 75.00.
CRB Index, Daily, 6 November 2009
The situation in the CRB is unusual. A weaker Dollar typically results in stronger
commodity prices, but in the recent week the commodity market has declined along
side the Dollar. 269 and 263 are support levels for the CRB with resistance at 278.
Amongst inter-market relations, the inverse correlation for the Dollar-CRB is amongst
the strongest. At the same time, it is also not cast in stone since both are inherently
different markets.
There are 2 ways to view this. The first is that this is an inter-market divergence, and
the relation will come back in line with either the Dollar strengthening to meet the
weak CRB, or the CRB strengthening to meet the weaker Dollar.
The second, is that this is marks the shift in perception that commodity prices are
high and is beginning to affect economic growth. Hence, a weaker commodity market
is good for equities.
Our view is that the latter scenario is unlikely at this point in time as it usually occurs
in the latter phases of a multi year bull market during a rate-raising cycle. In addition,
there have been no talks about inflation and commodities in the general media as
well.
Conclusion
The S&P 500 has formed a short term base and is pushing higher, possibly towards
the 1100 mark if it can clear resistance at 1070 and 1080 respectively. The Dollar has
weakened and is conducive for a stronger equity market as well.
The STI still trades somewhat in tandem with the direction of the S&P 500. With the
numerous levels of support and resistance on either side, it is likely to move in a
much slower, stair step fashion as it tests each level (support or resistance).
A firm confirmation that the S&P 500 trend is continuing higher is a close above the
most recent swing high at 1100. The most recent swing high is almost always a
psychological level for markets. A close past 1100 on the S&P 500 should help to
give the Singapore market more confidence and perhaps push the STI towards its
recent swing high at 2739 as well.
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