Written for First Post
October 22, 2011: All eyes are on Europe for the weekend announcement of the latest prescription to avert the debt crisis. The equity markets meanwhile gave mixed signals with the Indian, Japanese and Chinese markets falling, but the US markets rallying.

Note that the Dollar is a safety play, where investors rush to avert risk.  Hence if the Dollar rallies, one can be sure that equities that are a risk play will sell off. One can also look at the Euro-US Dollar currency pair. An increased risk aversion will also result in the fall of the Euro.

The Dollar index is near a support level of 76 that we had mentioned in previous articles. (Click here for Dollar Chart) The index closed at 76.28 and remember that prices often rally from support levels. In case the 76 level is broken on the index the prices can drop down to the next support level near the 75.50 level. The fact that the Dollar index is in such close proximity to support levels increases the chances of a rally. The market has placed a lot of emphasis on the weekend announcement from Europe and is expecting a large (some expectations top $2 trillion) package. A perceived smaller package can lead to disappointment pushing up the dollar index and deflating equities.

Interestingly, the Indian, Japanese and Chinese markets don't seem to be expecting much out of Europe. They have adhered to the resistance levels we'd mentioned in last week's article. Prices often fall from resistance areas. For Hang Seng index we had mentioned that the resistance level was around 5300. It briefly went over the level last week only to close lower at 5092 on Friday. For the Japanese Nikkei 225 index the resistance level was around 8870 and it closed at 8678 on Friday, after going above the resistance level once last week. In the case of the Sensex the resistance level was at the 17,300 area and prices never reached that level and closed at 16,785 on Friday.

However, the US markets acted contrary to the other markets. The S&P 500 index had resistance in the range of 1170 and 1235 but closed above the range at 1238 on Friday. Analysts are attributing the rally to strong corporate earnings in the US. But we'd never know if it was earnings or the hope of a grand package out of Europe that drove the index up. It's also important to note as we mentioned in the article last week that the S&P 500 has resistance slightly above at 1265. Hence, a rally in the S&P 500 is likely to be stopped just a few points higher.

The conflicting signals given by the US markets on one hand and the other markets makes forecasting difficult. Hence it's best to wait for the announcement out of Europe, see the reaction of the dollar index and then trade the equity markets. Also remember that the US futures markets open on Sunday evening and one can watch those too get an inkling of how the spot equity market will open.