Stock Futures Post Daily Reversal Tops; Correction May be Looming
stock futures markets posted daily closing price reversal tops on Thursday,
sending a signal that a correction may be looming. It is going to take a break
through Thursdayâ€™s lows however to confirm the formation which would then
trigger the possibility of a 2 to 3 day break or 50% correction of the last
Early in the trading session, good news from J.P. Morgan
equities for a short-time before the markets caved in due to pressure from the
On Wednesday the Fed released a less than stellar outlook
for the economy, but it was Thursdayâ€™s bearish inflation and manufacturing
reports which encouraged investors to take profits, driving stock prices lower.
Throughout this week, stock prices have been driven higher
by investor optimism and a bullish outlook for strong earnings. Investors for
the most part chose to ignore economic data, but the Fedâ€™s outlook yesterday
and todayâ€™s reports finally made them sit up and take notice. The bottom line
is, despite better than expected earnings during the second quarter, the
economy is losing steam. Traders could begin pricing in the prospects of a
double-dip recession, thereby pressuring equities.
September Treasury Bonds surged on Wednesday following the
release of the Fedâ€™s dismal outlook for the economy. This drop in yields was a
strong sign that interest rates were headed lower and that the Fed would keep
its benchmark interest rate low for a prolonged period of time.
On Thursday, this market continued to move higher as money
flowed out of equities and into the fixed income market. A new higher bottom
was formed at 125â€™07. Upside momentum indicates that the market could test the
year for the year at 128â€™19 over the near-term.
August Gold finished slightly lower but remained rangebound
as traders assess the current trading conditions. On one hand, the bulls want
to buy gold because of the weakening Dollar, but the bears want to sell gold
because of the possibility of a deflationary scenario developing in the U.S. In
addition, the soaring Euro may be prompting the unraveling of more Long
Gold/Short Dollar spread positions. Until market conditions are clarified, Iâ€™m
leaning to the short-side as the main trend is down and the market has yet to
correct to the major 50% level at $1158.30.
The U.S. Dollar was crushed on Thursday by a soaring Euro
and British Pound. Economic worries pressured the Dollar all day as investors
left the greenback in favor of the currencies backed by the stronger economies.
The fact that the U.S.
is still wallowing in debt while the European and British governments talk
about austerity measures and cutting costs may have also contributed to the
weakness in Dollar.
Because of the sharp sell-off in the Euro and Sterling earlier in the
year, some are attributing the current rally to a short-squeeze. In other
words, bearish investors are being forced out of the market not by fresh
buying, but by short-traders scrambling to get out. In this case, itâ€™s not the
weakening U.S. economy
driving traders into the Euro and Sterling,
but rather short traders paying anything to protect whatâ€™s left of their
profitable positions from the Spring.
What is clear at this time is that the U.S. economic data continues to
show weakness. In addition to the actual released figures, economists are
contributing to the weakness by downgrading U.S. growth targets.
Less than one day after the Fed said that GDP would slow and
the jobs outlook would remain sluggish, more bearish data was released on
Thursday.Today the New York Fedâ€™s
Empire State Survey fell to 5.08, its lowest reading since December. Also the
Philadelphia Fed Manufacturing Survey declined to 5.1 in July, well below
pre-report guesses of 10.0, reaching its lowest level since August 2009.
Although industrial production posted a more than expected
gain of 0.1 percent, the core manufacturing component fell 0.4 percent, more
than expected and the first decline in four months. Finally, the third
consecutive monthly decline in producer prices renewed concerns about a
deflationary scenario developing.
This week a plethora of data along with a dovish Fed outlook
is pointing to a weaker economy which is likely to keep the pressure on the
Dollar. Interest rates are also expected to remain low for a prolonged period
of time since the latest inflation data suggests the Fed cannot move them
higher. Furthermore, there is renewed talk of new stimulus measures which will
mean more Dollars flooding the markets. All of this is prompting a call for a
weaker Dollar over the near-term. This was particularly event in the Euro and
British Pound on Thursday.
The September Euro surged to the upside on Thursday as a
combination of weak U.S.
economic data and better than expected demand for Spainâ€™s debt triggered a sharp
breakout to the upside. Before the U.S.
markets opened, the Euro was receiving support from the news that Spain
raised nearly $3.85 billion in 15-year bonds.
Technically, todayâ€™s rally in the Euro took out a key 50%
level at 1.2783 and now appears to have enough upside momentum to challenge the
Fibonacci retracement price at 1.2998.In the best case scenario, one can project that the current upside
momentum and gloomy economic outlook for the U.S. economy is enough to drive the
Euro up to at least 50% of the entire sovereign debt break at 1.3510.
The September British Pound also soared on Thursday, putting
this market in a position to test a cluster of former tops at 1.5497 and 1.5523
on its way to a major 50% price level at 1.5635.
The fact that U.K.
inflation is rising and U.S.
inflation is falling was enough to drive investors into the British Pound at
the expense of the Dollar. This is because the rising inflation rate is
bringing the Bank of England closer to hiking interest rates while the falling
inflation rate in the U.S.
is keeping the pressure on the Fed to keep interest rates at historically low
levels. Once again investors are going after the highest yields, prompting
strong the strong demand rally for the Sterling.
Following Wednesdayâ€™s weak assessment of the economy by the
Fed, the U.S.
released data today pointing toward low inflation and weakness in
manufacturing. This news raised concerns about the near-term health of the U.S. economy, encouraging traders to think that U.S.
fundamentals are making the Dollar a less attractive alternative to investors.
Furthermore, now that the European Central Bank has taken steps to aid ailing
nations, investors want to move on from the sovereign debt issues in Europe.
Stronger demand for the Euro is likely to continue
until late next week when investors are likely to begin paring positions ahead
of the release of the European bank stress tests. On Wednesday, rumors began
circulating that eleven European banks are expected to fail their stress tests.
As we approach the release date, this type of rumor could encourage investors
to take profits after the recent rise and pare back positions until the
uncertainty clears up. Until the report is released on July 23rd,
look for trend traders to continue to drive the Euro higher as long as U.S. economic
data remains on the weak side.
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