Tuesday July 27, 2010 - 19:23:42 GMT
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Forex Hound - www.forexhound.com
Stock Markets Wavering; Technical Reversal Top a Possibility
stocks are trading weaker at the mid-session after investors decided that a
drop in consumer confidence carried more weight than a string of better
earnings reports. Equity futures actually reached their highs shortly before
the opening and never really got on track, forming a top even before the
consumer confidence data was released.
Technically this potential topping
formation is taking place at a time when cycle watchers are looking for a major
top. A closing price reversal formation will be the best sign that a top has
been reached. This pattern generally leads to a 50% correction of the last
major rally and/or a 2 to 3 day break.
Although stocks are showing a potential
top, there is still no sign in the Treasury markets that a major break is
imminent. The Treasury market is most likely under pressure today because of
the increase in supply triggered by the 2-Year Note auction. This auction went
off at record low yields, garnering very little demand. A substantial break
late in the session in the equity markets will likely lead to a
flight-to-safety rally in the Treasurys. This will force traders to take the
government debt regardless of the yield.
After piercing a minor .618 retracement
level this morning, selling pressure hit the Euro after U.S. Consumer
Confidence fell more than analysts had estimated. The report pressured equities
and drove down demand for higher risk assets.
Todayâ€™s action is significant because it
shows that investors have set aside worries about the European bank stress
tests and are now turning their focus toward economic reports. Traders seemed
reluctant to go long this morning after the U.S. reported a slight gain in home
prices and amid improved corporate earnings. This represented a shift in
sentiment as earlier in the month investors chased the Euro on both good and
bad news for the Dollar.
The housing report in particular was
interesting because it gave hope that the housing market may be improving
although at a slow pace. Although reports have been confusing to investors
lately, todayâ€™s break looks as if buyers just gave up on the long side of the
Euro or they are making up excuses to take profits. Todayâ€™s break also
demonstrates the strong correlation between the Euro and U.S. equity markets at this time.
Technically the Euro is in a position to
form a daily closing price reversal top. This could lead to the start of a 2 to
3 week break if confirmed.
The break in the U.S. equity markets is also leading
to profit-taking in the higher risk currencies. All three major asset-linked
currencies â€“ Australian Dollar, New Zealand Dollar and Canadian Dollar â€“ are in
positions to post closing price reversal tops. If sentiment is turning bearish
on risk then look for the start of a correction in these three markets.
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