U.S. Stocks Rise Overnight after Reversal Bottom Formation
The June E-mini S&P 500 followed through to the upside
Tuesday night confirming the daily closing price reversal bottom formed earlier
in the day. Based on the current short-term formation, traders should watch for
a 2 to 3 day retracement with 1105.75 to 1122.00 the next possible upside
A similar pattern is developing in the June E-mini NASDAQ. Now
that the reversal bottom has been confirmed, traders should watch for a 2 to 3
day rally to perhaps 1868.00 to 1895.
How high this short covering rally takes the major stock
market averages and indices is up to the hedge funds and large traders who have
taken control of the stock market. Although oversold conditions have made the
markets ripe for wicked retracement rallies, there does not seem to be a change
in trend to up in the works. Like any developing bear market, the major players
will treat any significant rally as a new shorting opportunity.
The main concern for investors continues to be the fear that
the sovereign debt issues in the Euro Zone are out of control and threatening
the global economic recovery. Evidence is mounting in the corporate debt world
that credit is tightening in a move very similar to the events which unfolded
prior to the seizing up of the credit markets in 2008. At times it feels like
the major financial institutions are being threatened by conditions very
similar to what was happening during the Lehman crisis of 2008.
In addition to the worsening credit conditions, including
rising Libor rates, tensions between North and South Korea are making investors
uneasy, leading to the current rotation out of risky assets.
Watch today for more short-covering, but be aware that major
hedge funds and institutions are lurking out there to apply fresh short
The strong recovery rally in the stock indices helped push June
Treasury Bonds down into the close, but the market was able to hold on to its
gains. Overnight the T-Bonds have eased due to the strength in the equity
markets. A follow-through to the upside in the equity markets is likely to
trigger a break back to 123â€™00 over the near-term. Losses may be limited if
there is great demand for Treasuries during the auction.
June Gold is trading overnight in reaction to the weaker
Dollar. The rally in gold is being triggered by both fundamental and technical
news.Fundamentally, gold is up because
of uncertainty and risk in the Euro Zone. Traders are buying gold as a hedge
against the possible collapse in the Euro.
Technically, the main trend is up which means investors will
continue to buy dips. The recent range of $1249.70 to $1166.00 has set up a
possible retracement to $1207.80 to $1217.70. This zone is currently being
tested in pre-opening activity.
September Crude Oil is recovering this morning after
regaining a key 50% price level at 72.16.The stronger Euro is helping to produce this morningâ€™s relief rally. The
charts indicate that 75.18 is the next potential upside target before new
selling pressure arrives. The current developing rally is merely short-covering
and bottom picking. Fundamentally, a slow down the slow down in demand should
show up in todayâ€™s crude oil inventory report.
The June Euro recovered overnight after a firm close. On
Tuesday, this market successfully tested the low for the year at 1.2143,
triggering a short-covering rally. If this low holds, then it will mean that
last weekâ€™s reversal bottom is still intact while indicating that buyers have
stepped in to support the currency.
The best sign that a bottom is being formed and that Tuesdayâ€™s
action was a successful test of the low will be the regaining of the Fibonacci
retracement level at 1.2345. Holding this level could trigger a further rally
to the 50% price at 1.2407. Building a fresh support base in this price zone
will be a sign of higher markets to follow, but the main trend will not change
to up until 1.2671 is taken out.
A break though 1.2143 will indicate that further downside
movement is likely with the early 2006 price at 1.1825 the next likely downside
The main catalyst behind the weakness in the Euro is concern
that Europeâ€™s sovereign debt issues are
spreading, threatening the global economic recovery.
Traders have been selling the Euro since early Sunday evening
took over a struggling financial institution. The move accelerated to the
downside after the International Monetary Fund said Spain has been too slow to
strengthen its banking system. This statement by the IMF helped create
uncertainty in the market leading to the current sell-off.
Technically, the Euro is oversold, but it is going to take
an easing of concerns in the Euro region before any of these oversold
indicators will have any relevance.
Tuesdayâ€™s action was the first sign that actual buyers may
have entered the market. This usually happens after the type of reversal we saw
last week. Following a prolonged move down in terms of price and time, the
first leg up is usually short-covering. The first leg up is 1.2143 to 1.2671.
Following a test of a retracement zone or the actual bottom, the next leg up is
usually new buyers.
At this time, oversold conditions are battling the bearish
fundamentals. In other words, traders know the fundamentals are bearish, but
canâ€™t seem to muster up the courage to short this market again and again at
such extremely low levels. Since the Euro is in a long-term decline, traders
must get used to the possibility of whip-saw conditions at times while facing
Watch for the Euro to try to build a base between 1.2407 to
1.2345 then make a run at 1.2671. A breakout over this level is likely to
trigger a massive short-covering rally to about 1.2917.
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