Weak economic reports from China ignited a sell-off in the
equity markets on Wednesday but the embers were burning well ahead of the
release of reports showing a decline in Chinese industrial output and weak
The Fed most likely triggered the pessimistic outlook for
the global economy on Tuesday when it said in its policy statement that it
expects prolonged weakness in the economy and loosened its monetary policy by
shifting assets from mortgages to long-term debt in order to keep its balance
sheet from expanding.
stocks are were down sharply, threatening to take out key bottoms formed less
than two weeks ago. Concerns about a worldwide economic slowdown were the main
catalyst which drove down demand for higher risk assets.
With both the U.S. and Chinese economies critical
to the global economy, many investors are beginning to worry about the worldâ€™s
Last night the U.K. also contributed to the equity
market weakness after the Bank of England lowered its growth outlook. With new
austerity measures ready to kick in along with higher taxes, investors are
worried about the strength of the British economic recovery.
Stocks lost more ground early Wednesday morning after the U.S. said its
trade deficit widened to $49.9 billion in June, more than many analysts had
anticipated. This news caused some experts to revise downward second-quarter
After seven days of rangebound trading, the September E-mini
finally broke out of its range to the downside. This type of pattern usually
indicates impending volatility which we saw on Wednesday. If volatility
continues to expand, then look for the market swings to become exaggerated.
Technically this market broke through a 50%/uptrending Gann
angle combination which triggered stops into the mid-1090â€™s. So far this index
is holding a swing bottom at 1083.50, but downside momentum is building which
could see this level taken out. This would change the main trend to down.
Ultimately, the E-mini is set up for a minimum correction to a 50% level at
All of the commodity-linked currencies were down hard on
Wednesday. The Australian Dollar was down the most because of its strong link
Downside momentum is building in this market which could trigger a test of the
last main bottom at .8904. Ultimately, this market seems destined to test a
major 50% price level at .8644.
U.S. Treasury debt continued their acceleration to the
upside as money fled equities for the safety of U.S. debt. The action by the Fed to
buy Treasury Bonds was partially responsible for Wednesdayâ€™s rally. The
Treasury complex continues to be the best indicator for the state of the U.S. economy.
As long as the economy continues to cool, expect more upside pressure.
December Gold continues to be the most interesting market.
Investors are trying to decide whether to follow the Dollar, deflation or
equities. I believe that gold and equities are competing for the same Dollar so
Iâ€™m expecting more upside action. Gold has been sitting in a range for a few
days which means impending volatility. This market is either going to explode
to the upside through $1215.00 or correct back to $1186.30.
The flight to safety rally sent investors into the Japanese
Yen. Buyers stepped in however after the Yen reached a 15 year low. Talk is
circulating that the Japanese government may attempt to intervene. Its biggest
concern at this time is that a rise in the Yen will hurt exports. This
expectation coupled with talk of lower demand from China
and the U.S.
will hurt the economic recovery.
The British Pound was down over 1% on Wednesday as worries
about a slowdown in the economy forced investors to wonder if the U.K.
economic recovery was slowing down.
Overnight the Bank of England lowered its forecast for
growth expectations in its quarterly inflation report. The BoE cited declining
confidence, tight credit conditions and the governmentâ€™s planned austerity
measures as the main reasons for the reduction in its outlook. In May, the
central bank forecast about 3.6% growth. The revised number is 3%.
Although the U.K. Gross Domestic Product was more than
expected during the second quarter, a key central bank official indicated that
the total growth for the year would most likely average out.
In a statement, BoE Governor Mervyn King said, â€śbusiness and
consumer sentiment have shown signs of softening, measure of financial
fragility remain elevated, and there is great uncertainty about the outlook for
both the United States
and our most important trading partner, the euro area.â€ť
This statement cast on pall on the British Pound and the
Euro, triggering hard sell-offs in both of these markets.
changed its daily trend to down on Tuesday when it took out its last swing bottom
at 1.5819. Today this market tested a key 50% level at 1.5635. Although an
intraday technical bounce took place, triggering a small short-covering rally,
this level is not likely to hold. The major downside objective is an uptrending
Gann angle from the 1.4229 bottom at 1.5429.
The slide in the Euro continued on Wednesday with this pair
losing over 2%. A slowdown in the global economy is expected to hit the Euro
Zone particularly hard especially since it is barely recovering from the
sovereign debt crisis from sixty days ago.
Technically, the main trend on the daily chart turned down
earlier in the week. Downside momentum is strong and selling pressure hard, but
short-term indicators are indicating this market is getting close to oversold.
The bigger charts indicate this market is likely to continue down until it
reaches a major retracement level at 1.2605. Short-term, however, there may be
a technical bounce at an uptrending Gann angle at 1.2836. This angle is being
tested overnight. If profit-takers come into the market, then watch for a
snapback rally to 1.3085 before the selling resumes.
Continue to look for the mass exodus out of higher risk
currencies to continue, however investors should watch for quick short-covering
rallies in most of the major currencies because of short-term oversold
conditions. This first break in the British Pound and Euro may be only long
liquidation. The chart patterns suggest there may be one more rally to test
their recent highs. This move will give fresh shorts an opportunity to re-enter
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