The U.S. Dollar and equity markets traded in a relatively tight range overnight ahead of this morning’s U.S. employment report.  Traders are looking for an improvement today from the November report.  Guesses are for a job loss of “only” 125,000 and for the unemployment rate to hold steady at 10.2 percent.  There is some debate as to whether this is the low for the unemployment rate.  At this time the consensus agrees the rate will stay the same this month, but is likely to rise to 10.5 percent by the end of the first quarter 2010.  

Equity markets are expected to drop sharply if the jobs loss figure comes out well above the guess or if the unemployment rate rises. Yesterday there was evidence that the Dollar and the stock market were decoupling.  In my opinion, a better than expected jobs number will trigger a rally in the Dollar but not necessarily the stock market.

Ask most economists if the unemployment rate is a lagging or leading indicator, and they will tell you it lags the economy.  At this time, I think traders are looking at the unemployment rate as a “pseudo” leading indicator.  This is why I believe the Dollar will benefit the most from a better than expected figure.

On Thursday, stock index futures ended the day lower after bids were pulled late in the session allowing the market to plunge to new session lows.  Although the December E-mini S&P 500 made a new high for year, the inability of the Dow and NASDAQ futures to follow-through to the upside created a bearish divergence that helped weaken the market throughout the day.

At the time the S&P was making its high, the Dollar was weakening but not making new lows.  This made traders nervous since the driving force behind the 9 month rally in the equity markets has been the weaker Dollar. Many traders got trapped on the long side of the market yesterday morning following a gap higher opening and a friendly initial claims report.  The gap opening was triggered by aggressive Asian buying following Wednesday’s late session report that Bank of America was going to pay back its TARP money.

Although the main trend is still up in the equities and some will say it was position evening ahead of tomorrow’s U.S. Non-Farm Payrolls Report, yesterday’s failure and subsequent break looks a little more bearish.  The outside move down so close to a major 50% retracement level in the S&P at 1122.00 makes one wonder if this was the final leg up.  A trade through 1077.75 will officially turn the main trend down on the daily chart, but a trade through Thursday’s low at 1097.50 today will confirm the reversal top and give traders the first clue that a top has been formed.  

Traders should pay particular attention to last week’s close at 1089.50 today.  This price may be tested early in the trading session if weakness develops after the Non-Farm Payrolls Report, but this price will have more significance on the close.  

Yesterday, March Treasury futures had little reaction to the sell-off in the equities.  The stronger initial claims report earlier in the session basically took control of the markets by pushing up demand for higher yields.  Fixed income futures treaded water most of the day ahead of today’s U.S. employment report.  The March Treasury Bonds settled right on a 50% price at 120’06.  This price is likely to control the short-term direction of the market today. Downside pressure could arrive late in the session as investors may begin to look ahead to next week’s $74 billion Treasury auction.

The U.S. Dollar Index withstood another test of the low for the week at 74.31 and last week’s low at 74.27 on Thursday.  The higher close was impressive, but this market is still lower for the week. Overnight action has been mixed but strong upside momentum could trigger a challenge of last week’s close at 75.04.  If you want to be safe about the long-side, it is suggested that you wait until this market clears 75.66 before considering buying.  

Yesterday, the December Euro rallied early in the session following the announcement from the European Central Bank that it would begin withdrawing its stimulus money from the Euro Zone economy, but backed-off last week’s high at 1.5144 when ECB President Trichet called for a stronger Dollar. This price remains the strongest resistance at this time.  Weakness could push this market back to 1.4972.

The December British Pound is rallying ahead of this morning’s U.S. Non-Farm Payrolls Report.  Traders are expecting a choppy, two-sided trade over the next few days as market participants adjust positions ahead of next week’s Bank of England meeting.  Early calls are for interest rates to remain unchanged and for the BoE to maintain its asset-buyback plan.  Yesterday, worries over a weakening economy helped to pressure the December British Pound, but there is still not enough evidence to say that a secondary lower top has been formed.  

The December Japanese Yen is trading in an inside range overnight with a slight bias to the downside.  On Thursday, the Yen traded lower for a third straight day.  Earlier in the week, the Bank of Japan announced another stimulus plan designed to promote economic growth.  Pressure could be on this currency until December 17th when the BoJ holds its formal meeting.  Traders are nervous about holding long positions because of the possibility of an intervention.  Currently, this market is testing a major 50% price at 1.1307.  There could be a technical bounce to the upside from this level, but a failure to hold could trigger a further decline to 1.1195.

The December Canadian Dollar is mounting a strong comeback ahead of this morning’s U.S. and Canadian Employment Reports, but it still remains inside of a key retracement zone at .9574 to .9505.  Trichet’s call for a stronger Dollar helped pressure the December Canadian Dollar yesterday, but the most bearish influence came from lower equities and flat crude oil.

February Gold fell sharply overnight in a follow-through break following yesterday’s weak close.  Upside momentum seems to be slowing with most of the buying this week coming from overnight purchases in Asia and Europe.  New York traders seem to dislike the upside at current levels.  Last night’s action has made $1227.50 a new minor top.  Bullish traders should get nervous if this market finishes the week under $1175.50.
March Crude Oil closed lower on Thursday and last night’s subsequent break has helped form a new main top at 81.52.  The current chart pattern suggests that this market should break back to at least 78.20 to 77.42.  The supply/demand fundamentals already suggest lower prices, but it will take weaker equity markets and a stronger Dollar to send this market sharply lower.  

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