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Tuesday May 18, 2010 - 13:26:05 GMT
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U.S. Stocks Strengthen as Demand for Risk Picks Up

U.S. equity markets are called higher this morning in follow-through buying following Monday’s strong finish. Stocks were under pressure at the mid-session yesterday but mounted a strong short-covering rally into the close. The turnaround to the upside in the Euro was the catalyst behind the rally. The June E-mini NASDAQ managed to close higher with the Dow and S&P 500 trailing closely.


Pressure has been on the equity markets lately because of investor concerns about weakness in the Euro Zone and the possible negative effects it may have on future corporate profits. Early in the session on Monday, the June E-mini S&P 500 tested a key 50% level at 1115.50. This price remains important support followed by 1101.50. Although downside momentum took the market through this price level, the mid-session recovery after the test of this price helped trigger a short-covering rally into the close.


Based on the June E-mini short-term swing of 1174.75 to 1112.75, traders should look for a retracement to 1143.75 to 1151.00 before new selling takes place.


If traders can set aside the activity in the Euro today, the focus will shift back to economic data. Today investors have a chance to react to inflation, housing and key earnings reports. Earlier this morning, Home Depot reported a first-quarter jump of 41% on margin and sales growth. This number beat analyst estimates. Later this morning, Wal-Mart Stores is set to report. This report will give traders a clue as to how the consumer is spending.  


The turnaround in the equity markets is helping to keep the June Treasury Bonds in a tight range. Overbought conditions and oversupply could be other reasons for the flat trade. Retracement zone resistance is at 122’05 to 122’22. This area stopped the rally on Monday. The daily chart indicates that a move to 119’12 is possible over the near-term. Earlier this morning it was reported that China returned to the Treasury markets after being absent for a few months. This news helped provide a little support. In addition, China has reportedly regained its position as top purchaser of U.S. debt.


The firmer Euro is helping to drive June Gold lower overnight. Monday’s inside day indicated impending volatility, while last night’s action confirmed last Friday’s closing price reversal top. The chart pattern suggests that this market could correct back to $1203.00 to $1192.00. With the main trend up, watch for a technical bounce inside of this zone.


The stronger Euro and oversold conditions is helping to boost the June Crude Oil contract this morning. Based on the short-term range of 87.15 to 69.20, traders should watch for a short-covering rally to take this market back to 78.21.


This morning’s rally in crude oil is purely a technical play. Fundamentally, traders still feel a slow down in the Euro Zone economy will lead to a slow down in demand.

Oversold conditions and the lack of fresh bearish news are helping to support the June Euro overnight. Fundamentally, nothing has happened overnight to change the minds of traders. Investors are still concerned that the European Union is not doing enough to fix the financial problems in the Euro Zone. The lack of confidence in the European Union continues to remain the major reason behind the selling. Investors want clarity not just ideas from the EU. This would include the implementation of new austerity measures by the five countries at the center of the financial problems: Portugal, Italy, Ireland, Greece and Spain.


Technically, the Euro confirmed the daily closing price reversal bottom at 1.2233. This should trigger the start of a 2 to 3 day rally or a move back to 1.2787 to 1.2918. A rally into this zone will not be a change in trend, but is likely to attract fresh selling pressure.


The June Swiss Franc posted a daily closing price reversal bottom on Monday and confirmed the pattern overnight. This type of formation sets up a possible correction back to .8952 to .9002 over the next 2 to 3 days. The direction of the Euro will dictate the movement in the Dollar/Swiss.


The recent divestment out of the Euro has been putting strong appreciation pressure on the Swiss Franc. The Swiss National Bank fears that continuous selling pressure will hurt price stability and put the Swiss economy at risk. The main concern is damage to the export market will stall the economy. SNB President promised to act in a decisive manner which could mean another round of intervention should the Euro weaken substantially.


The June British Pound is holding inside of yesterday’s range. The tight overnight range indicates impending volatility. Earlier this morning, it was reported that U.K. inflation surged 3.7%. This report has had very little influence on the Sterling.


Bearish talk has been circulating that the previous government pushed through spending measures which will make the new government’s attempts to cut the U.K. deficit and balance the budget more difficult. Pressure is likely to remain on the British Pound as the new government is likely to propose severe budget cuts and tax increases which could put a strain on the economy. Investors are also concerned that the weakening economy may encourage the Bank of England to renew its bond buying program which would have a negative influence on the economy.


Like the Euro and Swiss Franc, the British Pound chart pattern suggests oversold conditions which could mean the start of a 2 to 3 day short-covering rally. Unless there is fresh news regarding the economy, traders should be careful about shorting the Pound at current levels.


A late session turnaround in the U.S. equity markets on Monday and the follow-through rally overnight is helping to push the June Japanese Yen lower. If sentiment shifts toward risky assets then look for selling pressure to build against the Japanese Yen.


The June Canadian Dollar fell Monday morning but ran into support at a 50% price level at .9592. The minor reversal to the upside indicates that a 2 to 3 day rally is likely. The first objective at .9735 was reached overnight. Upside momentum could trigger a further rally to .9772. A change in investor sentiment should help the Canadian Dollar. Traders should watch crude oil and equity prices for direction. Greater demand for risky assets means greater demand for the Canadian Dollar.


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