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Weekly Market Outlook – December 19th, 2009

On the economic front we were handed a mixed bag, but mostly bullish underpinnings

Despite Friday's late gains, it still wasn't enough to push expiration week back into the black for the market. The S&P 500 closed 4.0 points lower (-0.36%) than the prior Friday's close. It was the fifth straight week of the bull/bear stalemate, and as we've mentioned before, the longer the bulls don't make progress, the greater the pullback risk becomes.

Needless to day, none of the indices hurdled their key ceilings last week. We standing pat on the stance that stocks will need to go significantly lower again before going higher. More details are below.

On the economic front we were handed a mixed bag, but mostly bullish underpinnings.

Producer prices as well as consumer prices were rose by a little more than expected. Though the media tends to balk at slightly higher inflation, history has shown that moderated inflation such as that is actually coincidental with economic growth. Capacity utilization, productivity, building permits, and housing starts were all also positive in addition to being better than expected.

On the downside, new and repeat unemployment claims were not only both higher than last month, but both were higher than expected. Worse, the figure doesn't include former employees who've seen their unemployment benefits fully expire.

Take a look at the economic calendar, then keep reading for the detailed chart reviews.

Economic Calendar

Economic Calendar

S&P 500

We've switched to a weekly chart of the S&P 500, as it really serves up some perspective about how the rally since March has slowed to a halt over the last five weeks. The support and resistance arcs are still in play; the SPX just can't get over the upper edge of that range. In fact, the index has been stalled for such a long time, horizontal resistance (the old school style) has materialized around 1115.

While we hate to sound like a broken record, until that level is breached, going long on the markets not a viable trade. Factor in the bearish MACD crossunder on the weekly chart - the first in ten months - and it's even more difficult to get or stay bullish.

As before, we anticipate a move back to the arc's support line at 1040...which is holding steady.

S&P 500 - Weekly

S&P 500 - Weekly

As for the other two indices, there's not much to add that we can't glean from the S&P 500's chart. So, we'll not waste words or time. Just know that the NASDAQ managed to gain 18.67 points last week (+0.85%) thanks to strong tech gains on Friday, while the Dow Jones Industrial Average lost 1.3% to end the week at 10,328.89.

There is, however, a chart very much worth exploring.... the U.S. Dollar Index.

U.S. Dollar Index.

With the U.S. Dollar staging a huge and surprising rally over the last two weeks, a lot of investors are calling for demise. The assumption is that the same conditions that drove it onto the ground throughout the year are still intact. Therefore, it has to move lower again.

The premise is right, but the assumption is wrong. The economy may well be in shambles, but relative to other economies, the U.S. currency risk is still less than the rest of the worlds'. Traders never quite grasped that, assuming what was seen in America was the only relevant influence. And, it would also be tough to deny that a little ‘gloom and doom' preaching was taken a little too far.

Said another way, the monster pullback of the dollar between March and now had little to nothing to do with fundamentals, and everything to do with overzealous speculation.

For that reason, we would strongly urge traders (and even investors, since this could lead to a long-term trend) to not shrug off signs simply because they indicate something that's hard to believe. Charts don't lie. Charts are what they are. The dollar's going higher for a reason. It may not be a good reason, but it's no worse or no better than the reason the dollar got shellacked for the better part of 2009.

Of course, Murphy's law now dictates that the sawbuck will head south again now that we've said there's a new trend in place. That's not our point though. We're just saying don't try and dismiss a chart's clue that would be interpreted in a different way were it any other trading instrument. Don't forget, the dollar's bears were betting against it after the August 2008 pop as well, and it continued to rally 17%.

U.S. Dollar Index

U.S. Dollar Index

Read the original blog entry...

More Stories By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

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