Thursday November 4, 2010 - 03:42:33 GMT
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Stocks Could Move Higher; Gold Indicates Uncertainty
The rebound in the U.S. equity markets indicates that
stocks are poised to move higher. Although the Fed told us nothing that wasnâ€™t
already built into the market, the fact that more liquidity was made available
shouldnâ€™t hurt equity prices. Stocks could also benefit from an improving
economy especially if Fridayâ€™s U.S.
employment data comes out better than expected.
Technically the indices appear to be in breakout mode, but
we have watched this pattern for several weeks. The problem is investors donâ€™t
seem willing to chase it higher, so this makes it vulnerable to short-term
corrections. Investors arenâ€™t fools. They know we are at lofty price levels and
the economy is teetering between recovery and recession so they still want to
get value for their buck.
The Gold market is forming an interesting pattern. The
weaker close could be indicating that perhaps a bearish assessment for the
Dollar is not in the cards. Like I say in my comment about the Dollar, the
conditions are ripe for a bottom except a support base hasnâ€™t been built. Gold
is saying, not so fast. I believe the Fedâ€™s low inflation assessment is keeping
the bulls on the sidelines, but at the slightest hint of inflation, I think
they will be ready to strike.
So while it appears the Gold bulls have given the current
round to the Fed, they will be waiting for any stumble in the economy. Gold
traders will also be watching the Greenback. If a support base is being built
or the Dollar makes a closing price reversal bottom then continue to look for
Gold to weaken.
Sure there was volatility, but everyone expected that but
for the most part, the Fedâ€™s policy statement announcement in my opinion was a
non-event. Technically, shortly after the news was released, the Dollar Index
plunged to a new low, but the quick rebound to almost unchanged for the day
indicates to me that the move was most likely triggered by thin trading
Although the rebound did not produce a closing price
reversal bottom, it did come close, indicating that perhaps the shorts have run
out of gas or there are buyers out there. Spike moves are usually not good
indicators or major bottoms unless there is follow-through to the upside. This
makes Thursday an important day.
The U.S. Dollar may have hit support on Wednesday, but a
spike bottom is not a good sign of a major bottom. The Greenback needs to form
a support base because my technical works says that the height of the rally is
determined by the length of the base. Without good structure rallies are likely
to fail. This being said, continue to look for weakness in the Dollar until it
can establish a support base.
One other clue suggesting a possible bottom will be taking
out the last swing top on the daily chart at 78.51. Or better yet, the previous
main top at 78.61. Unless this market starts taking out shorts to attract the
buyers, continue to look for lower prices.
Another key indicator of a possible major bottom will be a
weekly closing price reversal. All the components are in place for a reversal.
We have a prolonged move down in terms of price and time. Now all we need is a
higher close, close above the weekâ€™s opening and a close above 50% of the
weekâ€™s range. Last weekâ€™s close was 77.46. Watch for the bears to defend this
area if tested, but donâ€™t get excited about the long side until the bulls can
regain this price.
The Fed said it would buy
up to an additional $600 billion in long-term Treasury bonds until the end of
June 2011 as part of its quantitative easing strategy to support a sustained
economic recovery. Read
additional details on QE2
â€śThe Fedâ€™s statement and
action is largely in line with expectations, and although it is hard to call
this anti-climatic, the initial price action has been largely reversed,â€ť said
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in
â€śThe Fedâ€™s focus still
seems to be on inflation moving in the wrong direction and this is what
investors will have to monitor,â€ť he said.
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