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Monday April 19, 2010 - 13:45:39 GMT
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Risk Adverse Traders Selling Higher Risk Stocks and Commodities

Fallout from the SEC/Goldman Sachs situation is pressuring U.S. equity markets overnight. Last week’s closing price reversal top in the June E-mini S&P 500 has been confirmed which sets up two scenarios. The first scenario calling for a daily chart break to 1190.75 has already happened. The second scenario calls for a break to 1178.75.


This appears to be developing into the worst threat to the bull market since it began in March 2009. Going into Friday’s action, this “mature” bull market has been struggling despite better than expected earnings and an improving economy. Long traders have been coming in everyday looking for a reason to sell and may have gotten it on Friday. This often happens in bull markets because long traders look at the size of the rally and wonder how the market is going to sustain itself if the buying stops because of lofty price levels.


Traders should watch to see what happens in the June E-mini S&P 500 following a test of 1171.00. A breakout through this level will turn the main trend to down for the first time since March 1st. A move through this level could set up an even steeper decline to 1123.25.


The June Treasury Bonds and Treasury Notes rallied late Friday in a flight to safety rally as equities and commodities broke hard. Despite lower stocks and commodities this morning, however, the Treasuries are trading flat. Conditions are ripe for the rallies in both of these instruments to continue, but the huge amount of supply in the markets may be helping to limit gains.


June Gold is under pressure because of the stronger Dollar. Based on the last swing of $1086.10 to $1170.70, look for a correction into a retracement zone at $1128.40 to $1118.40. Short-term oversold conditions could trigger a technical bounce following a test of this zone. The main trend remains up and the current move suggests that this is only a correction but sentiment could shift if $1118.40 is violated.


The main trend turned down in June Crude Oil overnight following a break through the last swing bottom at 83.75. In addition, this market is currently breaking through a pair of uptrending Gann angles. This could help further accelerate the break to the downside. Overnight, there was a technical bounce following a test of 82.45. If this price fails, look for more selling pressure. Regaining 83.43 may trigger a short-covering rally.


The U.S. Dollar is trading higher against most major currencies except the Japanese Yen as traders seek shelter in lower yielding assets following Friday’s news that the SEC was charging Goldman Sachs with defrauding investors.


The developing situation is wreaking havoc on commodity-linked currencies since Goldman is a major player in this type of market. Traders are also taking protection against the possibility that this SEC investigation will involve other major investment banking firms. This is also coming at a time when the government is pushing hard for more financial firm regulations. The U.K. and the E.U. are also reportedly ordering their own investigation into Goldman’s practices.


Additional pressure is coming from developing problems in Greece. Traders expect Greece to trigger the mechanism that allows it to tap the recently approved rescue package. Late last week the spread between Greek Bonds and the German Bund widened to over 400 basis points for the first time since the bailout plan was approved. This indicated that traders were nervous and concerned about Greece’s ability to survive. Others believe that the $61 billion bailout figure will not be enough to ensure Greece’s viability.


Finally, traders are also pressuring commodity prices in anticipation of a Yuan revaluation. Many traders feel this move will pressure the Dollar versus the Japanese while helping to boost the U.S. Dollar against the New Zealand and Australian currencies.


Today is a light day for economic reports. At 10:00 a.m. EDT the government releases its Leading Indicators report. Investors are looking for a 1.1% increase. This report should not have that much impact on trading although it will signal that the economy is still on its road to recovery.


Sharply lower Gold and Crude Oil has helped wipe out almost all of this month’s gains by the June Canadian Dollar. Losses may be limited, however, because of the Bank of Canada meeting on April 20th. Traders expect the BoC to give a strong indication of an interest rate hike sooner than expected. The Canadian financial markets are indicating that the next hike is likely on June 1 rather than the previously anticipated July 1.


Fear that the SEC’s investigation of Goldman Sachs may indicate more financial regulation of U.S. financial markets and a reworking of the rules for foreign banks is helping to pressure equities and commodities, giving the lower yielding Japanese Yen a boost. Traders who have borrowed in Yen are being forced to sell higher yielding assets to use the proceeds to pay back the loans. This is triggering the strength in the June Japanese Yen this morning.


With the situation in Greece continuing to unravel and the traders still sorting out the details of the Goldman law suit and its impact on the markets, look for the Dollar to be a big winner today against most majors with the exception of the Japanese Yen. Traders seem to be expecting both problems to escalate before they get better.


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