Picture this: American soldiers march into Baghdad through the smoke left by daisy cutter bombs and the smolder of mangled antiaircraft gunner nests. Elite Iraqi troops greet them by handing over weapons, high-stepping into formation and then sitting cross-legged in the shape of a peace sign.

Sure, this seems absurd. But reports after the close Wednesday relay what some U.S. officials believe about so-called "secret surrender" negotiations with Iraqi military leaders that have allegedly been carried out by non-Pentagon "elements" of the governments.

The upshot is that some -- or many -- Iraqi soldiers may not fight. Some may literally go into a formation that displays a noncombative status and lay down their arms. Therefore, without a fight, it would be a quick and less-costly war. Casualties on both sides and the expense of rebuilding Iraq would be minimized.

Rumors of all kinds have been -- and are likely to continue -- circulating, roiling financial markets. But the "secret surrender" scenario is plausible and capable of producing upside pressure for some markets. How might this play out the rest of the week and in the days, weeks or months before the conflict ends?

Sweet Surrender

The secret-surrender scenario is positive for the dollar. Gulf War I in 1991 cost the U.S. roughly $61 billion. But about $53 billion of that was paid for by Europe, Japan and Saudi Arabia.

As the current logjam at the U.N. suggests, if the U.S. wages war unilaterally, it would have to pay for the lion's share of the war and rebuilding efforts. That's something America can ill afford to do amid a ballooning federal deficit.

Anything that mitigates the expense of the potential war is positive for

June dollar index futures


April gold

(GCJ3:COMEX) would continue sinking from a less-combative war. We've already seen a $40-per-ounce decline from the $384.50 high. The flight-to-safety buying in the metal appears to be contained for the time being.

A rising dollar from a secret-surrender scenario would only make gold relatively more expensive, putting additional downside pressure on the metal.

A "shorter war" view would also remove the bid in T-bonds and 10-year notes and give stock index futures an excuse to rebound.

Prelude to a Slide

Last Thursday, I

pointed out how the

March S&P 500 futures

(SPH3:CME) might have trouble breaking above key intraday Fibonacci resistance at the 831.50 level.

The intraday high after the report topped at 829.70, missing the beginning of the resistance band by 1.80. The S&Ps went on to cascade as many as 41.20 handles after halting just below the Fibonacci zone.

But just before the descent, this trade brought up a frequent dilemma: Should the S&Ps have been shorted before rising exactly to the 831.50 resistance level?

What transpired is instructive and highlights how using levels -- or any nonmechanical approach -- requires some right-brained, interpretive skills. Markets often remain below key resistance levels (or above support in bull phases) before strong drops. Such price action is, in fact, an indication of weakness. The key to initiating a position both prior to a level and at a level is recognizing a pattern setup.

Staying with the 15-minute timeframe of last Thursday's trade setup, notice the subtle clues in the following chart. The market hit high the prior day, Wednesday (6) at 830.00. During Thursday's session, the S&Ps tested but held below 830. Friday's (7) 11-handle, lap-down opening demonstrated market frailty.

Also in Friday's session, there were three additional tests of Wednesday's high. Each test remained marginally below the 830 handle, alerting one to the possibility that the market would fall short of the 831.50 Fibonacci zone.

By day's end Friday, we had essentially a quintuple top that had demonstrated washout potential by the 11-handle lap down. If you didn't want to take a position home over the weekend, more evidence of weakness came Monday morning with another lap-down opening. The S&Ps never traded above the high of the opening 15-minute bar, a point that could have served as your protective stop-out point for any short positions initiated on the opening.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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