Stocks Called Flat; Counter-trend Rally May be Over
The September E-mini S&P 500 is trading flat to lower
overnight. Last nightâ€™s range was inside of Tuesdayâ€™s range, indicating that
traders are non-committal at this time. Yesterdayâ€™s rally was a follow-through
move of Mondayâ€™s reversal bottom. This pattern usually leads to a 2 to 3 day
rally equal to 50% of the last swing down. Yesterdayâ€™s up move already
completed the first objective so the counter-trend rally may be over.
The direction of the market is likely to be determined early
today. Watch for an early test of 1082.50. If this low price holds and support
forms, then look for the start of a rally. If this area fails and the market
cannot regain it throughout the day, then look for downside pressure to build.
December Crude Oil is trading lower overnight. Last nightâ€™s
API report showing that inventories rose unexpectedly is the catalyst behind
this morningâ€™s weakness. Experts were calling for a drop in inventories, but
the actual build was 5.87 million barrels. Selling pressure started in Asia and
is expected to continue at the U.S.
Trading could turn sideways ahead of this morningâ€™s EIA
inventory report which is expected to show a slight rise, but the sell-off is
likely to resume unless the EIA report surprises traders. With the global
economy showing signs of weakness, oil traders are looking for a drop in
Technically, the December Crude Oil is resting near the .618
retracement level of the 71.50 to 84.45 range. For four days the market has
been trying to establish support at 76.45, but with selling pressure building
overnight, look for traders to try to push oil through this potential support
Stops are likely to be triggered initially, but there may be
an acceleration to the downside if the inventory report is bearish. Traders
will gain confidence playing the short-side if the fundamentals are on their
December Gold backed off its high on Tuesday after testing a
downtrending Gann angle. In addition, the market closed under a .618
retracement level at $1228.00. The pattern suggests some light profit-taking,
but there is still the possibility of heavy selling pressure if the 50% price
at $1215.00 fails to hold. Gold traders are likely to take their clues from the
equity markets today. Weaker stock prices are likely to drive gold prices
higher. If stocks strengthen, then look for gold to make an attempt to test
The September British Pound erased early session losses and
is now expected to open better in New York following the release of the Bank of
England minutes which showed that the Monetary Policy Committee voted 8 -1 to
keep interest rates at historically low levels.
Besides voting to keep rates low, the BoE also voted to
maintain its asset-purchase program at 200 billion pounds. The MPC discussed
both easing and tightening at its latest meeting before voting overwhelmingly
to maintain the status quo.
Inflation is the key matter being discussed in the U.K.
at this time, but MPC members found the time to talk about concerns over tight
credit conditions, the impact of the governmentâ€™s proposed budget measures on
economic activity, and weaker business surveys that pointed to slowing output
Regarding inflation, the BoE said â€śthe weight of evidence
continued to suggest that the margin of spare capacity was likely to bear down
on inflation and bring it back to target in the medium term once the impact of
temporary factors had worn off.â€ť
The lone dissenter, Andrew Sentance, argued that rates
should go up 25 basis points because inflation risks were not temporary and
actually was skewed to the upside.
Itâ€™s obvious where to the two differ. The central bank sees
high inflation as a temporary condition and Mr. Sentence believes it will
remain a risk to the economy.
Sentenceâ€™s argument that inflation is not a temporary
condition is based on the fact that inflation has been above the BoEâ€™s 2%
annual target in 41 out of the past 50 months and the governmentâ€™s planned
increase in value added taxes would mean that inflation would stay above target
longer than the central bank had previously projected. With the vote to keep
rates steady, 8 to 1, it is clear that the other memberâ€™s donâ€™t buy his
argument and truly believe that inflation will ease back below the 2% target by
2012 without any additional help from the central bank.
If there is truly enough spare capacity to drive inflation
lower, then the BoE is likely to be right, but a sudden shift in demand could
use up this excess, thereby driving up inflation or at least holding it steady,
but above target. In my opinion, the BoE is predicting a slow down in consumer
demand, and this cannot be good for the economy.
The inflation data released on Tuesday showed annual
consumer inflation slowed to 3.1% in July from 3.2% in June. Although central
bank officials acted surprised by the figure, BoE Governor Mervyn King issued a
letter reiterating that spare capacity would eventually weigh on prices.
Technically the Sterling
has been trying to build a support base at the 50% price level of the 1.5123 to
1.5997 range at 1.5560. Last night this level was pierced but the market found
buyers waiting at a long-term uptrending Gann angle at 1.5509 today. Tests of
this angle have produced bottoms four times since the main bottom was formed at
1.4229 on May 20.Because of the
strength demonstrated by this angle currently and in the past, one has to
conclude that a break through this level will trigger a massive acceleration to
Shortly before the New
York opening, the British Pound is trading higher and
in a position to post a daily closing price reversal bottom. This formation
suggests the possibility of a two to three day rally back at least 50% of the
last swing down. This makes 1.5729 an upside target over the short-run.
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