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Equity Futures Feeling Pressure from Reduced Appetite for Risk

James Hyerczyk from ForexHound.com at 12/08/09


U.S. equity markets are trading lower at the mid-session following a sell-off which began in Asia and Europe. The stronger Dollar is leading some investors to pare positions as traders become more averse to risk. Traders are trying to protect profits at the end of the year as chart patterns suggest there is more downside than upside potential at current levels. Earlier this morning, the December E-mini S&P 500 futures broke a retracement zone at 1098.50 to 1093.00 before stopping at 1087.75. If the market can regain the zone then look for a possible short-covering rally to 1103.75 to 1107.00. The December E-mini Dow took out its retracement zone at 10357 to 10321. Regaining this level could trigger a short-covering rally back to 10375 to 10406.

March Treasury Bonds are in a strong position after regaining a key retracement price at 118’31. The chart indicates that the next upside target is 123’00 to 118’15. March Treasury Notes are in a similar position with 119’00 to 119’11 the next upside targets. Treasury futures rose overnight, erasing almost all of the loss following Friday’s unemployment report. Weaker equity markets and yesterday’s comments from Bernanke calling for interest rates to remain low for a “prolonged” length of time are helping to give March T-Bonds and March T-Notes a boost. New buying is surfacing today because of credit concerns over government finances. Today’s 3-Year Note auction could prove to be a challenge for the Treasury now that the yield premium built into this market on Friday has been eliminated. The results of the auction will be released later today.

This morning the Bank of Canada announced that interest rates would remain at 0.25 percent until June 2010 and that it was still concerned about the strength of the currency and its possible negative affect on exports. This news helped send an already weak December Canadian Dollar sharply lower. Technically, the Canadian Dollar crossed over to the bear side of the .9094 to .9798 range when it crossed the mid-point at .9446.

The December Euro is continuing to weaken after breaking the last main bottom at 1.4801 yesterday. This currency pair is currently in a freefall with 1.4625 the next downside target. This morning’s sell-off was triggered by the news that Moody’s cut the credit ratings on six Dubai state-linked companies. In making the decision, Moody’s is of the opinion that it cannot assume the government will back the debt of these companies.

Currency traders concerned about risk are buying the lower yielding Yen, driving the December Japanese Yen sharply higher. This rally is occurring despite the approval by the Japanese government of a new $81 billion stimulus package. Traders are not reacting to this news because it was announced last week and was already priced in. Currently, the Japanese Yen is trading on the bull side of 50% of the 1.0834 to 1.1790 range at 1.1312. A rally through this level indicates a move to 1.1403 to 1.1494 is next.

The British Pound accelerated to the downside this morning on concerns that credit problems in Dubai would spread to U.K. banks. Earlier this morning a report showing that U.K. house prices rose for the firth consecutive month was not enough to ignite buying interest in the December British Pound. Industrial Production was unchanged in October, reminding investors that the economy was still in a weakened state. Manufacturing output was also flat. Further complicating the possibility of a recovery is the threat by the U.K. government to raise taxes and trim spending.

Technically, the GBP USD is trading on the mid-point of the 1.5702 to 1.6876 range at 1.6289. The Pound is currently holding two bottoms at 1.6258 and 1.6245. A break through these levels will send the market to 1.6150.

The December Swiss Franc weakened when it took out the old main bottom at .9782. Downside momentum could drive this market to .9675. Swiss Franc traders are also being influenced by the movement in the gold market. Weakening gold is pressuring the Swiss Franc. Losses in the Swiss Franc could be limited by a short-covering rally in gold later this afternoon. On December 10th the Swiss National Bank is expected to leave its benchmark interest rate unchanged and offer clarity as to its future monetary policy plans. Most traders expect the SNB to discuss its concerns about deflation and the possibility of another round of intervention if the Swiss Franc appreciates too much against the Euro.

February Gold is down because of the strengthening Dollar but above yesterday’s low. Investors are being “coached” by gold bug analysts to “buy the dips”, but this strategy could prove to be risky if the Dollar strengthens further. The recent vertical rise in this market suggests that an asset bubble may have been formed. Without new central bank buying pressure, the small trader will not have enough money to support another leg higher. This could lead to a further collapse in this market to at least $1107.00 over the short-run. March Silver is in a down trend and currently searching for support in the 17.83 to 17.44 range.

March Crude Oil remains under pressure because of lower equity prices, a stronger Dollar and low demand. A shift in trader mentality out of higher yielding assets could drop this market into 75.53 to 73.63 over the near-term. Speculators drove this market higher and speculators leaving this market will drive it lower.

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