The Precise Take – Overnight weakness ahead of opex Friday

Leaders Analysis:  After posting a less than convincing upside reversal bar yesterday, the EuroYen forex cross (a barometer of risk appetite) is now trading below its 200 day moving average.  It poked below on July 8 and October 2, but closed above each of those days.  A close below the moving average today would be the first such since it broke above on May 22, and would warn of not only an interim equities top, but possibly a longer term one.  A close above and subsequent rally tomorrow would suggest there is more life in the rally.  30 and 10 Year Treasury futures are still hovering at resistance and a strong move either way will confirm the EuroYen.  The US Dollar is up near its 20 day moving average, which has provided support and resistance since early October.

US Dollar Correlation:  Yesterday,  Goldman Sacks released an interesting report that suggested the US Dollar carry trade (borrow Dollars to invest in risk instruments) was not the only possible reason for the strong negative correlation between the Dollar and equities, but that many foreign investors in US instruments are increasingly hedging their foreign exchange risk.  Accordingly, a purchase of a basket of US stocks would be matched with a concurrent sale of the US Dollar, and the reverse upon the close of the trades.  This makes sense, and suggests the unwinding of the carry part of the US Dollar decline may not be as dramatic as is currently believed by many.

Medium Term Update:  Next week is US Thanksgiving on Thursday.  Tuesday will feature the first revision to Q3 GDP and Wednesday is Durable Goods, both of which have the potential to weigh on the markets if they disappoint.  However, the Friday after Thanksgiving is historically bullish on holiday shopping euphoria.  Accordingly, longs will want to break to new highs by Monday ahead of GDP to continue the rally.  If equities are not down too much after the close this week, look for this possibility Monday.

Trading Today:  The ES has pared some of its overnight losses on the 8:30 am Jobless Claims report.  The daily S2’s need to provide support early for the longs (1096.75 to 1097.50) because there is little support below until 1091.50.  There is a large sell zone…

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