Charted Territories

By Jim Donnelly, Olson Global Markets

On the heels of a number of significant downgrades on European debt by Standard & Poor’s rating agency on Friday, the U.S. Dollar Index (DXY) appears to be in position for a possible test and likely break above key downtrend resistance currently sitting at the 82 level.

Although many investors had expected downgrades to occur, the impact of these downgrades along with the breakdown of talks betweenGreeceand a number of creditors trying to negotiate a restructuring of its debt could propel the DXY even higher.

If the U.S. Dollar Index were to break above the 82 resistance level, a move up toward key resistance in the 87 area could ensue. In turn, a corresponding move could force yields on U.S. Treasury 10-year notes to move solidly lower and toward a key technical level sitting near 1.40%. Moreover, a likely “risk off” stance by investors could send the S&P 500 index (SPX) sharply lower as well.

If this scenario were to play out over the intermediate-term, a longer-term outlook on the DXY could envision an eventual move toward the 100 area, where the “backside” of former trend line support (now resistance) currently sits. The implications of such a move would carry overtones of a deflationary environment, a condition that Federal Reserve Chairman Ben Bernanke is trying to avoid. Thus, recent hints of another round of quantitative easing (QE) would likely be realized in theU.S.along with additional attempts by the ECB to stoke stimulus inEurope.

http://www.ogmarkets.com/

By Jim Donnelly, Olson Global Markets

After a steady 5-year decline, the Keefe, Bruyette & Woods U.S. Bank Index (BKX) finally broke above primary downtrend resistance at the 40.90 level. Prior to the bullish “breakout”, the BKX formed a “basing pattern” that took nearly six months to develop.

Interestingly, last week’s trend line break occurred despite continued and prolonged worries over that strength of European banks. Those banks, however, recently received a big “shot in the arm” from the European Central Bank (ECB) in the form of cheap 3-year loans. While the jury is still out on whether such a maneuver can eventually help to recapitalize a number of those troubled banks, it is clear that ECB did move in a bold way to stabilize their credit system. This at the very least has postponed an immediate banking crisis from emerging. In turn, that has helped reduce fears of contagion spreading toU.S.banks.

Moreover, a number of positive signs regardingU.S.employment have helped to improve investor psychology heading into the New Year. In turn, these employment data have caused a number of economists to upgrade their GDP forecasts for Q4. Improved auto sales and hints of stabilizing housing prices in selected areas of the country have also been a plus.

With these observations emerging, the U.S. Dollar Index has found gradual, but broad-based support as well …despite near-zero percent short-term interest rates.

From a technical point-of-view, the Keefe, Bruyette & Woods U.S. Bank Index (BKX) is in position to extend its recent gains since overbought conditions are not yet present. With that in mind, it is worth noting that the next key resistance area is near 47.50 where key trend line resistance now sits.

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