Thursday September 23, 2010 - 12:52:58 GMT
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Bad Economic Data from Europe Sinks Stocks
Stocks weakened overnight after a report said Europeâ€™s services and manufacturing industries weakened
for a second month, igniting concern the regionâ€™s economic recovery might lose
equities havenâ€™t been the same since the Federal Reserve warned on Tuesday of a
weakening economy in its monetary policy statement while hinting that
additional quantitative easing may be necessary to stop the U.S. economy from derailing.
The Fedâ€™s assessment of the economy may have put a little
fear in the minds of traders, who failed to hold on to gains following the
Federal Open Market Committee, triggering a technical closing price reversal
top in the December E-mini S&P 500 at 1144.00.
On Wednesday, traders confirmed the reversal top, setting up
the potential start of a major decline of at least 50% of the recent rally.
Based on the main range of 1032.50 to 1044.00, bearish traders may generate
enough downside momentum to take this market back to at least 1088.25.
A few days ago I warned that the weakness in the E-mini
S&P may take time to develop and that while the bearish pattern developed,
the break would be labored. This was because the market had to work its way
through a Fibonacci level at 1128.00 and a pair of old tops at 1124.50 and
Once these price levels are cleared, there will be room to
the downside with an uptrending Gann angle on the daily chart at 1112.50 the
most likely target. After this price a
50% price level at 1103.50 could provide limited support depending on the
momentum at the time it is tested. A failure to hold this level sets up an even
further decline to 1088.25.
Traders should note that the weekâ€™s low at 1117.00 is still
intact. This price level has no major significance other than it provided the
support to launch the rally to the weekâ€™s high at 1144.00. Another price to
watch for intraday technical bounces is last weekâ€™s close at 1119.75. A close
under this price on Friday will form a weekly closing price reversal top which
will be a strong indication of lower prices to follow.
The current weak action in November Crude Oil clearly proves
that it has detached itself from the Euro and is now realigning with the U.S.
economy. This could prove to be a bearish combination should the U.S.
economy continue to weaken as forecast by the Federal Reserve.
Technically, crude oil is trading in the middle of the last
main range of 71.49 to 78.86. This retracement zone is 75.18 to 74.31. A
breakout in either direction over these retracement levels is likely to trigger
an acceleration in that direction.
Also hemming in this market is a pair of Gann angles.
Currently, crude oil is walking down a Gann angle at 75.36. This angle has been
serving as resistance. Additional resistance is coming from another
downtrending Gann angle at 75.16. The support angle is at 73.99 today.
Last week the main trend turned down on the daily chart when
the market broke a swing bottom at 75.24. The lack of follow-through to the
downside, however, signaled that this market was not ready to break. Traders
instead chose to sell rallies.
A shift out of risky assets could be the catalyst behind a
sell-off this week. If the stock market begins to make a sharp turn South, then
look for it to take crude oil with it.
equity markets are trading lower, helping to push November Crude Oil to the
bottom of its range. Currently this market is testing its lowest boundary at
73.99. With the market trading on the bearish side of the retracement zone, a
sustained break under 73.99 could lead to an acceleration to the downside.
Risk aversion appears to be the theme developing today based
on the strength in the U.S. Dollar and Treasury Bonds and the weakness in the
equity markets. The bad manufacturing news from Europe has forced traders to
face reality after several days of euphoria over better than expected European
bond auctions and the Fedâ€™s weak assessment of the U.S. economy. Fear of a halt in the
global recovery could spread pretty quickly throughout the markets if European
economic data begins to show signs of a slowdown.
A poor showing in the equity markets today and Friday could
be setting up an even harder break next week.
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