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Equity Markets Soften as Traders Reevaluate Long Positions

Forex Hound Analysis Team from ForexHound.com at 01/20/10


U.S. equity markets followed the lead of lower Asian and European markets today and sold off sharply from the get-go.  U.S. investors are concerned that the weak condition of the economy cannot support stock prices at such lofty levels.  Some investors say that the current break is setting up another buying opportunity.  The bears will be watching Friday’s close for indications of a reversal top.  This could lead to the start of a 2 to 3 week correction.  Some bulls fear that end-of-the-year liquidation may be taking place early. 


Treasury futures rallied today as money left higher risk assets for the safety of the lower-yielding T-Bonds and T-Notes.  This money movement helped drive yields lower.  Both bonds and notes have been finding support lately on the thought that a weaker economy will force the Fed to leave interest rates low.


The U.S. Dollar posted a strong gain versus major currencies on Thursday as investors pulled money out of higher risk assets and sought refuge in the safer Greenback.  Recent weak U.S. economic data is making traders think twice about buying riskier stocks and commodities at the current lofty levels.


The December Euro traded sharply lower early in the trading session but managed to erase more than half of the loss by the close.  Traders have been sensitive to recent comments from European Central Bank President Trichet who tried to talk up the Dollar.

From a technical perspective, the Euro is range bound between 1.4625 - 1.5049.  The mid-point of this range at 1.4865 is becoming short-term support.  A close below this figure will be a sign of weakness. Regaining 1.5000 on a closing basis will be a bullish sign.


December British Pound traders largely ignored friendly October retail data and pressured the British Pound most of the day.  Investors are still trying to sort out the meaning of the split vote between Bank of England members regarding its quantitative easing plan.  Some say there is mixed interpretation of the economy while others feel that this is a sign the BoE may begin easing up on its asset-buyback program.  Either scenario is making British Pound traders uncomfortable holding long positions.  Technically, the recent strong rise was a little too much for the market to handle.  The current overbought condition could trigger a retracement all the back to 1.6292 before serious buyers re-emerge.  Credit issues are beginning to crop up again which could make long traders nervous.


December Gold sold off sharply during the early part of the day session, but turned positive late in the day to finish higher.  The weaker Dollar was the driving force behind this morning’s early weakness in precious metals, but speculators quickly read this as a buying opportunity.  Short-term technical indicators show an overbought market, but the best sign of a top will be a failure to make a new high on the current rally.


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