Stocks Recover as Buyers Step in after Midday Break
Buyers came out the second time bearish traders tried to flush weak stock
investors out of the market about midday on Tuesday, triggering a late session
short-covering rally which enabled the indices to close on their highs.
After an early morning short-covering rally, U.S. equity markets resumed their
sell-offs, and made new lows about mid-session. The inability to follow-through
to the downside scared shorts out of the market, triggering a strong rally that
built upside momentum into the close. Fallout from the SEC/Goldman Sachs
situation was the main reason behind the early session weakness in the U.S. equity
markets. Last weekâ€™s closing price reversal top in the June E-mini S&P 500
was confirmed. This pattern sets up a potential break to 1178.75 but the strong
close indicates it may take a day or two before the down move resumes.
Mondayâ€™s action took back about half of the break from the 1250.50 top in
the June E-mini S&P 500. If this market is going to go down then look for
selling pressure to begin between 1195.25 to 1198.75.
The current developing top formation appears to be the worst threat to the
bull market since it began in March 2009. Going into Fridayâ€™s action, this
â€śmatureâ€ť bull market had been struggling despite better than expected earnings
and an improving economy. Long traders had been coming in everyday looking for
a reason to sell and may have gotten it with the Goldman news. 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.
The June Treasury Bonds and Treasury Notes rallied late Friday in a flight
to safety rally as equities and commodities broke hard, but sold off hard into
the close on Monday after U.S.
stock markets rallied. The inability to mount a strong rally in the face of
weaker commodities and equities indicates that there is too much supply in the
Treasury market. This makes every rally suspect as traders seem willing to
June Gold was under pressure early in the trading session on Monday because of
the stronger Dollar but fought back to nearly unchanged as the Dollar gave back
most of its gains. Oversold conditions may have contributed to todayâ€™s rally.
Technically, the market found support at a 50% price at $1128.40. This price
must hold or the market will break to at least $1118.40.
Jude Crude Oil completed a .618 retracement down to 82.45 before
profit-takers stepped in. The main trend is down, but the current chart
formation suggests a rally to 84.66 is likely over the near-term.
The U.S. Dollar finished higher against most major currencies but intraday
profit-taking helped the Greenback close well off its highs.
The early session rally in the Dollar began overnight in the wake of a
lawsuit filed by the SEC against Goldman Sachs on Friday. Aggressive selling by
investors of risky stocks and commodities helped trigger the rally. Weaker
equities, gold and crude oil sent a message that risk was going to be taken off
the table. Investors have been moving money to less risky, lower yielding
currencies since Fridayâ€™s surprise announcement on speculation the
investigation may broaden.
After an early session surge, the Dollar weakened throughout the day as
commodity and stock indices recovered after anticipated follow-through selling
during the New York
session failed to materialize.
The June Euro continued its slide early on speculation that Greece would
have to tap its rescue loans to meet its short-term obligations. The spread
between Greek Bonds and German Bunds continued to raise concerns that Greece was on
the brink of collapse if it couldnâ€™t service its debt. News that European air
traffic resumed after being shutdown for several days seemed to give equity
markets a boost which helped trigger a turnaround in the Euro late in the
The June British Pound was down sharply overnight and early in the New York session as
concerns continued to mount about the possibility of a hung parliament
following the May 6th election. Investors are worried that a virtual tie
between the Labor Party and the Conservative Party will mean that the next
administration will have a difficult time working out solutions to its current
budget deficit crisis. Continue to look for volatility as traders speculate on
the direction of the British Pound following the release of pre-election poll
The falling Euro helped send the June Swiss Franc lower early in the trading
session. Traders raised concerns that the Swiss National Bank would have to
continue to intervene to protect the Swiss economy, especially its exports.
Increased demand for lower risk assets helped give the Japanese Yen a boost
overnight as nervous traders sold off positions in higher risk, higher yielding
assets. The inability to break stocks and commodities after a sharply lower
opening triggered an intraday break in the June Japanese Yen that carried over
into the close.
A sell-off in gold and crude oil triggered a sharp break in the June
Canadian Dollar overnight, but the lack of selling pressure throughout the day
helped the Canadian Dollar recover some of its earlier loss. This break was
most likely profit-taking rather than fresh shorting. On Tuesday the Bank of
Canada meets to discuss monetary policy. The Canadian financial markets are
indicating that investors expect the BoC to lean toward increasing interest
rates as early as June 1st rather than the earlier speculated July 1st.
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