Once again, spotlight on the dollar

thumb_10.16.09_cme_6e_f_d_--_euro_futures_-_globex_delay10Keeping track of the dollar remains the single most important factor in the current rally off March lows and the pair to watch is EUR/USD. Global currency reserves are 64% in US dollars and 26.5% in Euros (source IMF). The dollar has fluctuated between 59% in 1995 to a high of 70.7% in 2007, hardly making the case for the greenback losing its overall global status anytime soon (rumors to the contrary last week led to a massive short squeeze on the euro and equities, but none of it has been substantiated). The short dollar trade is about as crowded as the short financials trade in March...

One quick look at the EUR/USD chart (Globex 6E), clearly outlines where we stand. We have had three rejections the past three trading days at trendline resistance off the June high (chart) and three bounces off the september 2008 high (1.4846), the immediate support level dollar bears need to hold. We have a sharp ascending wedge building off the September low (bearish) and a more long term one off the March low. The equity rally is dependent on a weak dollar as is the entire commodity complex. Thursday's overnight session had ES (SPX futures) tag 1095.50, which is almost to the tick the equivalent of SPX 1099.23 (December futures are around 4 points lower), an important level of resistance for the S&P. NDX (QQQQ) has been lagging SPX lately, although we did see a slight higher high for 2009 on Wednesday, but selling pressure resumed on the failure of the dollar to break support against the Euro. The lines are drawn, many traders are waiting for SPX to hit 1121, 50% of the bear market, but keep track of EUR/USD up here and the 1099 level for SPX.