Dow 10,000. Hard to reach, harder to leave

Last week was an extremely choppy one for equity markets. The Dow Jones oscillated around the milestone 10,000 mark all week, gapping through the level on a number of occasions. It exceeded 10,100 on a number of occasions but wasn't able to hold to that level for more than an hour at a time.

Last Wednesday evening in the last hour of US trading the Dow fell 150 points, or 1.5%. The move was sparked by the influential banking analyst Richard Bove's downgrade of Wells Fargo. The financials lead the market down sharply, with the S&P 500 financials index losing 3% in just one hour.

This should not be interpreted as a top for the equity markets, but merely a little profit-taking.

For intra-day traders and scalpers, last week's activity will have been warmly welcomed.

During the week the statistics bureau in Beijing announced that China's year on year gross domestic product grew 8.9% in the third quarter. This came on the back of massive stimulus spending and record lending growth.

However, the strong growth has caused speculation that the Chinese will rein back their stimulus spending, tightening both fiscal and monetary policy.

A recent Chinese government statement lends credence to this belief, and states that "the policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations".

Many believe that growth in China is positive for the global economy, but with such poor domestic demand, they can only really sustain their exporting strength if the rest of world recovers as well. It will be interesting to see how the Chinese economy performs if government spending contracts, and global conditions continue to remain slack. Chinese equities started to rally roughly four months before the rest of the world did this year, and are now trading roughly 12% lower than their high three months ago. If the Chinese market is a leading indicator of the global situation, then equities may be approaching a good selling point, but importantly we are not there yet.

There is always strong debate about the relationship between the US dollar and equity markets, and we have written frequently on the subject. This year there has been a strong negative correlation between the dollar and equities. The rally since March and accompanying drop in market risk aversion has resulted in a flight from the safe haven buying of dollar, and a 15% fall (from its March high), as measured by the dollar index. The weak dollar also makes it cheaper for foreign investors to buy US equities, and there are those who argue that this is a driving force behind sustaining this rally, however we believe this is putting the cart before the horse.

The Euro Stoxx 50 index is up just as much as the Dow Jones this year, and it is traded in the appreciating euro. The dollar index has declined on the back of fear about dollar's position as a world reserve currency, the size of national debt the US is accumulating, and most importantly investor optimism over the fate of the world economy.

Oil prices continue to power ahead

A week ago we commented on how the breakthrough $75/bbl on US light crude was a sign that the market could be moving higher, placing our initial target $80/bbl. This target was reached last Tuesday, setting a high at $80.40/bbl.

However, the high levels attracted the bears and profit takers as prices dropped rapidly to $79/bbl by Tuesdays close. As per norm, Wednesday's trading proved to be the most eventful with the morning session providing a continuation of the downward pressure from the previous night.

Prices fell to a low of $77.64/bbl, just shy of technical support at $77.50/bbl. It wasn't until the weekly oil inventories were released showing the market shot up strongly and broke through the $80/bbl mark, setting a fresh year high at $81.99.

The second target of $85/bbl still remains intact although at the time of writing, crude prices are under a little pressure. So what we would look for is the $80 level to hold as a support level. If prices can close above $80 by the end of the week then this a positive sign for the market to continue its upward trend to the $85 level. On the flipside a breakthrough $80 should see prices test the support level at $77.50. A breakdown of the medium term uptrend would occur if the $75/bbl level is broken.

Finally, it's been a few weeks since we've looked at the gold chart. It seems to be trading sideways which is understandable after the extraordinary move up in the past few months. The future direction looks likely to hinge on the dollar's next move. As mentioned last week, the euro/dollar remains at a pivotal point at $1.50. A substantial move higher could send gold prices past highs but the dollar is finding some support here so it may continue to trade sideways.

Paddy Haran & Vinay Sharma, traders at Delta Index