While the US markets were in low gear at the end of last week some rather striking developments were taking place in the foreign exchange market. The daily chart below shows the decisive break by the Euro above the $1.30 level and similar breakouts were seen for the British pound which is approaching $2.00 and the Swiss Franc which, relatively, saw the greatest uplift.

Chinese banking officials have been indicating that they are becoming concerned about their vast holdings of US denominated reserves and the convergence of interest rate differentials between the Euro and yen and the dollar are forcing a re-thinking of the carry trade between different currencies. The specter of the Federal Reserve being inhibited in its future monetary policy by the need to provide an underpinning for the US currency has not been adequately discounted in the soft landing scenario.

The equity market appears to be taking the declining dollar in its stride with the S&P 500 closing Friday's quiet post holiday session at 1400 with a minor decline of 0.4% for the day. We will be curious to see whether the sanguinity endures if the dollar keeps sliding.

The yield on the ten year Treasury bond finished last week very close to 4.5% which coincides with the bottom of the recent range.

Meanwhile the thirty year bond continues to seek out even lower yield levels below its recent range and this serves to further underline the severity of the yield curve inversion with thirty year rates more than sixty basis points below the short term rates.

The chart for the Nikkei 225 (^N225) clearly reveals the violation of the trendline through the lows which we commented on last week. The index has approached the 200 day EMA and it will be important this week to see whether this acts as a support level or not.

TRADE OPPORTUNITIES/SETUPS FOR MONDAY NOVEMBER 27, 2006

The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.

BMC Software surged on November 9th on very heavy volume and since the breakout a pullback channel has been forming which may be close to having run its course. Further upward momentum should be expected.

The chart for Computer Sciences (CSC) is almost the converse to the chart for BMC with a pullback from the severe drop in early November. The stock may attempt to regain the $53 level but we suspect that further weakness may be ahead.

Men's Warehouse (MW) also looks vulnerable to further weakness.

Ross Stores (ROST) has some clear signs of negative divergences.

West coast retail banks could suffer from the growing weakness in the real estate market in California and the chart for Wells Fargo (WFC) is pointing to distribution.

Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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