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Better Housing Number Boosts Stock Indices

James Hyerczyk from ForexHound.com at 12/22/09


U.S. stock indices added to their earlier firm tone with a strong rally following the release of a better than expected U.S. existing home sales report. Traders increased long bets that the U.S. economy would continue to recover. Last night’s rally took out the recent top in the March E-mini S&P 500, reaching 1114.75. The next upside targets are 1119.00 to 1122.00. Optimism over a U.S. economic recovery is encouraging investors to seek higher yielding stocks at the expense of Treasuries and Gold.

March Treasury Bonds and Treasury Notes continue to feel downside pressure at the mid-session. The friendly U.S. existing home sales report was another sign that the U.S. economy is recovering. This is encouraging investors to dump Treasuries in favor of equities in a traditional asset allocation play.

Japanese investors are moving money into the Treasuries. Investors are asking for higher yields because of concerns over the abundance of U.S. debt and the Treasury’s ability to pay it back.

The U.S. Dollar added to its earlier gains following the release of a better than expected existing home sales report. The rise in the Dollar following the release of good economic news is another sign that investors are returning to watching traditional fundamentals for direction.

The Dollar was trading a little better overnight following another downgrade of Greece’s debt, but gave back those gains when the U.S. released a lower than estimated final third quarter GDP report. The good news from the housing sector is likely to underpin the Dollar the rest of the day, but thin holiday trading could limit those gains.

The March Euro is trading lower at the mid-session. The combination of a downgrade of Greece’s debt by Moody’s and the better than expected U.S. housing report is helping to apply the downside pressure.

The March British Pound added to its overnight weakness after the U.S. released the friendly existing home sales report. Overnight U.K. GDP was revised upward to show a loss of 0.2%. The previous estimate was for a loss of 0.3%. Pre-report estimates were for a loss of 0.1%. Pressure is expected to continue until the U.K. economy starts to show growth like its European counterparts.

Rising Treasury yields continue to boost the Dollar against the March Japanese Yen. Optimism over an economic recovery in the U.S. is leading traders to sell the Japanese Yen. The recent rise in Treasury Bond and Note yields have become attractive to Japanese investors who have to sell the Yen to buy Dollars. Downside momentum is signaling a possible test of the October bottom at 1.0847 over the near-term.

The Dollar continues to rally against the March Swiss Franc. Not only are traders looking for the U.S. economy to recover faster than the Swiss economy, but some investors are factoring in the possibility that Euro Zone sovereign debt issues may spillover to the Swiss financial system. Falling gold prices are applying additional pressure on the Swiss Franc.

The strengthening U.S. economy is having a positive effect on the March Canadian Dollar. Although the U.S Dollar has faltered the past three days versus the Canadian Dollar, it remains inside of its October to November range. The mid-point of this range is .9446. This price is an important pivot. Additional pivot price resistance comes in at .9505. Look for the March Canadian Dollar to remain inside its trading range until either economy takes the lead.

February Gold hit its lowest level since early November this morning at $1075.20. This break was essentially a test of a .618 retracement level at $1079.00. The strong bounce off of this level could trigger a short-covering rally back to the 50% price level at $1107.40. Investors are reallocating funds at this time, and with expectations of a stronger Dollar, are cutting allocations to gold.

March Crude Oil erased its earlier weakness and is now trading higher for the day. Technical support at a .618 retracement level at 73.63 triggered a short-covering rally. The next upside target is 75.63. Strong upside momentum could change the trend to up on a move through the last main top at 76.33. Supply/demand issues continue to plague this market. Traders also feel that OPEC will not cut production while the world is still trying to mount economic recoveries.

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