Overbought Conditions Likely to Support Stock Indices Today

James Hyerczyk from ForexHound.com at 02/01/10

U.S. equity markets are showing small gains overnight as traders begin lightening up positions ahead of this Friday’s Non-Farm Payrolls Report. Economic reports may take a backseat throughout this week as traders try to determine how the employment picture has changed during the month.

Many investors are banking on a slight increase in jobs because of government census hiring. The kicker will be whether businesses have seen enough improvement in the economy to warrant new hiring.

Investors continue to remain skittish about the holding stocks because of less demand from China, problems in Greece and the Euro Zone and the prospect of weaker earnings later in the year.

Treasury futures are trading choppy overnight with a bias to the downside. Fear has been driving investors into the safety of the March Treasury Bonds and March Treasury Notes. The bigger picture still indicates that March Bonds are trading inside a major retracement zone at 118’24 to 119’24. A close under 118’24 will indicate weakness that could trigger the start of a break back to 116’06. Trading could be choppy and two-sided ahead of this Friday’s jobs report.

The weaker Dollar is helping to support April Gold this morning. Short-traders continue to respect the December main bottom at $1076.50. Oversold conditions have made this market ripe for a short-covering rally.  This is likely to happen if the Dollar weakens further.

Demand for higher risk is likely to help support March Crude Oil. Oversold conditions could encourage shorts to lighten up their positions as this market approaches the December bottom at 72.53. A weaker Dollar is also likely to help this market today. The bigger picture still suggests weakness because of low demand and high supply.

The U.S. Dollar is trading under a little pressure following an uneventful night session. This could be an indication on how the market is expected to trade the rest of the week ahead of Friday’s U.S. employment report. This report which is now being treated as a leading indicator is expected to show a slight increase because of government hiring of census workers.  Early guesses are for government hiring to contribute to a slight gain in January.

Overbought conditions may contribute to a weaker Dollar this week. Baring any surprises, the Dollar could see a choppy trade with a bias to the downside as traders pare positions ahead of Friday’s jobs data.

Overnight, the March Euro is trading better. Upside momentum could take this market back to the last main bottom at 1.4029. Key support remains 1.3800. This price represents a major 50% retracement level. The Euro is ripe for a short-covering rally, baring any flare-up of problems in the Euro Zone out of Greece or Portugal. 

The March British Pound continued to weaken overnight on the heels of a negative outlook for the U.K. economy. Traders are pessimistic about how the economy will respond following the ending of the Bank of England’s quantitative easing program. Early signs indicate that bearish traders are respecting the late December main bottom at 1.5832.

The March Japanese Yen is trading flat to a little lower after early session strength. Calm trading conditions will be supportive to the U.S. Dollar while fear will drive traders to the Japanese Yen.

Trading conditions have calmed in the March Swiss Franc market after last Friday’s break to the downside. The weaker Euro versus the Swiss Franc late last week may have triggered an intervention by the Swiss National Bank. Traders should continue to monitor the situation in Greece to see if it triggers another sharp break in the Euro. Based on current conditions, the Swiss Franc may rally back to .9522 before finding resistance.

The March Canadian Dollar weakened last night, but sellers stopped short near the December bottom at .9303. Demand for higher risk and overbought conditions could trigger a short-covering rally today. The chart indicates this market is could rally, provided gold, crude oil and equities show an upside bias.