Dollar Correction Gets Serious

NEW YORK -- As 2004 winds down, which will be the dominant money market influence: pre-holiday languor, frantic rounds of book-squaring or FOMC paralysis?

Probably all of those.

And the charts will distill all of the above into a single pattern for each market. The result, they suggest, will be a firmer dollar, steady-to-lower U.S. yields, and a higher stock market.
Until now, this week's strong move of the dollar was easily written off as a short-term correction in a long-term bear market. But a long-term downtrend presupposes the possibility of long-term corrections. This correction may be one of those.
For example, the spot U.S. Dollar Index peaked at 121.02 in July 2001, and the
downtrend low, 80.91, was recorded on Monday. The downtrend points as low as
77.72, which would be tested by February - April, I estimate.
But on Tuesday the index took out 81.87 resistance, and it moved as high as
83.18 earlier Friday. Current trading near 82.60 shows a failure near 83.62 resistance, which is a likely top. Late-day trading below 82.63 would confirm a
failure.
But the risk for dollar bears is a decisive move above 83.62, towards 84.79
resistance, the technical breakout point on the daily chart.
Similarly, the dollar, now near Y105.35, is just above Y105.31 support. An
extended rally, above Y106.81, would be a technical breakout. The dollar wouldn't have turned bearish unless it takes out Y103.99 support.
The euro continues to trade above $1.3185 support, near $1.3230 now, despite a
sharp early-Friday sell-off. Although bullish traders are on the right side of the market, in my opinion, profitable longs are going to have to wait out a couple of weeks of consolidation between between $1.3185 and $1.3403.

U.S. 10-year Yield Gets Rough

This is a rough neighborhood if you're a 10-year trader - the technical band between 4.234% and 4.077%, that is. The band is an important support area.
Although the yield is falling in line with a long-term downtrend, it will be liable to sharp corrective swings for now.
If I'm dead wrong about this market, last week's technical breakdown would be
reversed by a move above 4.234%. As it is, I don't expect initial target support
at 3.968% to be tested before Jan. 4.

Stock Market Uptrend On Hold

The DJIA is roughly 50 points below 10607.90 - 10629.10 target resistance. A test of resistance may bring about a pullback to 10450.00-area support - low technical momentum readings suggest as much. But trading since mid-November is evidently a consolidation pattern on the daily chart. The pattern suggests an eventual upside breakout, towards 10743.00.
The S&P 500 rallied nearly 16 points Thursday after dipping nearly to 1172.46 support. Corrective dips would bottom at or above 1172.46 - 1170.87 support. New
highs for the move, above 1197.11, would point the S&P towards first target
resistance at 1220.33.
A similar dip of the Nasdaq Composite, nearly to 2089.01 support Thursday,
means that a move to new uptrend highs, above 2164.63, would be targeting
2233.26.