Securities Research Services

Wednesday, October 20, 2010

Dollar May Give Market A Short Term Breather

The dollar was up on heavy volume yesterday and of course this hit equities hard. As we have been trying to drill into everyone's heads over the past week or so, the risks of getting long when the Dow was at resistance, the dollar catching a bid, and sentiment levels too extremely bearish were just too high.

Yesterday the market caved into this high risk scenario and marked a distribution day.

The dollar, however, is back at resistance measured by its 20-day average. The dollar generally doesn't turn on a dime so there is a good chance those who are short here will be frustrated the rest of this week when they don't get a waterfall to the downside like many are no doubt hoping for.

Nevertheless, the dollar is bottoming and preparing for a corrective bounce of one sort or another, so pressure on equities is likely to remain over the next few weeks and those trying to play the long side in this market are likely to be frustrated as upside participation thins out and as smart money sells into strength.

We aren't calling for a market top here mind you. Rather a much-needed correction that will likely last until the typical end of the year ramp up kicks off sometime next month.

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