Stocks Indices Reach Retracement Zone; Shorts Feeling Pressure
The September E-mini S&P 500 hemmed and hawed throughout
the middle part of the day but still managed to post a strong gain into the
close. Todayâ€™s rally was triggered by a better than expected U.S. Weekly
Initial Claims Report and renewed appetite for risk.
Investors have been gobbling up stock for a few days because
frankly no one likes the payout being offered by the Treasuries. In addition to
speculation that interest rates will remain low for a prolonged period of time
because of a weakening economy, investors are also anticipating a robust
This weekâ€™s strength in the stock indices has caught the
shorts by surprise, forcing them to cover their positions. Today the September
E-mini S&P 500 reached a minor 50% retracement level at 1166.00. Holding
above this could trigger an even further rally to 1181.00.
So far the action in my opinion has been short-covering, but
there seems to be a lot of power behind this move which could be painful for
stubborn short traders. The question is whether there will be one more test of
the recent lows in the indices to solidify the bottoming formation.
The better than expected Weekly Claims number helped drive
up yields on Thursday, driving September Treasury Bonds and T-Notes lower.
Although it is unlikely the trend will turn down in the Treasuries until the
economy gets back on track, the charts are indicating that a correction is due.
Look for a pullback in the T-Bonds back to at least 125â€™15
to 124â€™24 and in the T-Notes to 121â€™12 to 121â€™00. Todayâ€™s reaction to the
upbeat claims number should serve as notice to bullish traders as to how fast
the Treasuries can turn south if a series of economic reports begin to show
improvement in the economy.
The September Euro rallied early, traded in a range then
made a move to the upside in a lifeless trade on Thursday. Volume appeared to
drop off throughout the day following the European Central Bankâ€™s policy
statement announcement shortly before the start of the New York session. For the most part, the
Euro seemed to be taking its direction from the U.S. equity markets.
Earlier this morning the European Central Bank said that
interest rates would remain at a historically low level. While this was
expected, traders turned their focus toward ECB President Trichetâ€™s press
Trichet mentioned that the ECB will continue to provide
unlimited stimulus and liquidity to the financial system but the news that
really helped move the Euro higher was his â€ślackâ€ť of comments on the bank
stress tests. The fact that he didnâ€™t say anything negative about the tests may
have actually instilled confidence in investors.
Investors have been pessimistic about the bank stress tests
because they feel that they may not be stringent enough to reveal any serious
problems with the bank balance sheets. They had been expected Trichet to reveal
a little more about the scope of the tests but had to settle for limited
commentary. Since he didnâ€™t say much other than investors should wait and see
the results before judging, traders decided to take the â€śno news is good newsâ€ť
approach and rallied the Euro. The only negative that could have been construed
by investors was his comment that banks may have to recapitalize after the
publication of the stress tests.
This morningâ€™s friendly U.S. Weekly Initial Jobless Claims
Report helped bolster stock index futures before the opening, sending the Euro
and commodity-linked currencies higher. As stocks began to weaken as the
session approached its mid-session, traders began to take profits in the Euro.
The strong finish in the stock futures markets helped drive the Euro up into
Technically the Euro main trend is up on the daily chart.
This market has entered a key retracement zone at 1.2609 to 1.2782. Holding the
latter number is considered a sign of strength.
Based on the current trading action in the market, it looks
as if the direction of the Euro will be determined by the movement in the U.S.
stock market. As long as demand remains firm for equities, traders should look
for continuing strength in the Euro.
Despite the pick-up in demand for higher yielding assets and
the generally weak tone in the Dollar, the September British Pound finished
This morning the Bank of England left interest rates
unchanged as expected. The BoE is most likely going to leave interest rates at
these low levels for a prolonged period of time because of the new financial
austerity measures proposed by the new government. The BoE is concerned about
high inflation but cannot risk a double-dip recession by hiking interest rates
Today the U.K.
reported an increase in industrial production in June but traders ignored this
news saying the increase merely was an offset of the sharp sell-off in
industrial production during the height of the recession. Todayâ€™s weakness was
attributed to another drop in housing values. This report indicates that the
economy is still weak and could trigger a curtailing of spending by the
The sharp rise in U.S. equity markets helped boost
demand for higher yielding currencies. All three commodity-linked markets â€“
Australian Dollar, New Zealand Dollar and Canadian Dollar â€“ experienced
substantial gains on Thursday.
Technically, the Aussie and the Kiwi closed near previous
main tops which put them in positions to change their main trends to up on the
daily chart. Watch for an acceleration to the upside in the September
Australian Dollar on a move through .8858 and a similar move in the September
New Zealand Dollar on a trade through .7159.
The September Canadian Dollar is still in a downtrend, but upside
momentum is building which could help trigger a change in trend to up in the
short-run. The bigger picture still indicates that this market is rangebound
between 1.0064 and .9208.
Risk appetite could get strong if U.S. equity markets can overcome
nearby retracement zones. This increased demand for risk should continue to
underpin the Euro and the commodity-linked currencies while putting pressure on
the lower yielding U.S. Dollar and Japanese Yen. Clearly, traders donâ€™t like
the low yields being offered by the Treasuries and are willing to take on more
risk to get a better return at this time.
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