Written for First Post
November 26, 2011: The Dollar index has reached an area of strong resistance which could lead to a greenback sell off, triggering a rally in risky assets such as commodities and equities.

The dollar index, which measures the greenback against six major currencies has reached a level of resistance between 79.50 and 79.90. (Click here for Dollar chart ) On Friday the index closed at 79.69. Even as the Dollar index reaches an area of resistance the Indian stock market index--SENSEX and the US equity index--S&P 500 are near areas of support. Prices often fall from resistance levels and rally from support levels.

The Rupee
Before we look at the levels of the of the Sensex and S&P 500, let's examine the price action in the Rupee. Last week we had mentioned that the Rupee had neared an area of support at 51.70 against the dollar. The dollar index too was near a resistance level of  between 78.60 and 78.83. We had also mentioned that if the index breaks out of that level it could rally to the next level of 79.50 to 79.90 and that's exactly what happened.

As the Dollar rallied beyond the 70.83 level the rupee depreciated into the 52 level but bears were not able to push it down a lot. The Dollar continued to rally all through the week, but the Rupee began to rally after November 22, showing relative strength to the greenback. 

November 22 was the most recent bottom for the Rupee against major currencies such as British Pound, Euro, Swiss Franc, Yen and Australian dollar. The Indian currency has rallied from the November 22 level strongly in case of some majors and weakly against others. For instance the rally against the Pound was strong but weak against the Yen.

In case the Dollar begins to fall from it's resistance, we can see a strong Rupee rally. However a break higher from the 80 level can take the index to the 81.50 level.

The SENSEX

For the Sensex the 15,500 area is crucial. It has acted both as support and resistance in the past the and on Friday the index reached that level and caught a bounce. Now there are three factors that can work in favor of the bulls. First is the 15,500 level. A look Sensex chart (Click here for the Sensex chart ) shows with blue arrows how index has fallen lower from that level and also bounced higher in some instances. Now with the index coming down to it, there is possibility that the Sensex will bounce.

The second factor is that the Dollar index is at resistance and can fall. Equities are often inversely related to the dollar and if the greenback falls, the Sensex can rally. And finally, the S&P 500 is at a level of support and can rally. Global markets and the Sensex often follows the S&P 500.

S&P 500

Let us look at the SPY chart (Click here for the SPY Chart ). SPY is the exchange traded fund that tracks the S&P 500 index. The chart is a little more complex than the Sensex and Dollar index chart as the SPY is entering a gap. A gap happens when a stock or index closes at one level and opens at a different level either higher or lower. Prices gap higher when there is an extreme demand and low supply, due to which prices have to move much higher to find sellers.

On October 7, the SPY closed near 115.50 and opened the next trading day at 117.50. On Friday SPY closed at 116.34. The gap on SPY is marked by two white horizontal lines. The gap on the SPY is an area of extreme demand, which could lead to a bounce in prices. The only negative factor of this gap is that it happened in a middle of an uptrend. Gaps at the beginning of a trend are stronger than ones in the middle.

Since major asset classes are at key levels, now is not the time for equity traders to stay bearish and dollar traders to be bullish. However, if the levels are broken then expect the current trend to continue till dollar reaches the  81.50 level.