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S&P 500 Finishes Week Lower; Risky Assets Look Overextended

James Hyerczyk from ForexHound.com at 10/23/09


Trading ended in the stock index futures on Friday with the three major indices getting hit hard by selling pressure.  Lower demand for higher risk assets was the theme today as traders took profits and failed to buy on the dips. The recent sharp rise in the equity markets has led many traders to feel that current prices are overextended given the state of the economy.


Technically, all three major indices posted daily reversals down on October 21 which is usually a sign that the selling is greater than the buying at current levels.  In addition, the December E-mini S&P 500 posted a weekly reversal top while the December E-mini NASDAQ and December E-mini Dow manage to eke out small gains.  This divergence among the indices could be an indication that money is leaving the large cap stocks. 


Treasury futures finished lower as long traders sold off positions ahead of next week’s auction.  There seemed to be no buyers on weakness either for the same reason.  Stories are circulating that the Fed may exit from its current loose monetary policy sooner than expected.  The December Treasury Bonds and Treasury Notes seem to be indicating that investors will be looking for higher yields during next week’s auction.


The U.S. Dollar mounted a strong comeback on Friday.  This helped to erase most of the losses from earlier in the week.  The December Euro traded several times over the psychological $1.50 barrier before closing barely above this price.  Traders seem to be afraid to buy aggressively since this price was breached out of fear the European Central Bank will step in to halt the rise.  A report signaling the recession is still going in the U.K. helped sink the December British Pound.  Speculators had been driving up this market in anticipation of an early exit from the Bank of England’s stimulus plan.  The December Japanese Yen also fell sharply as Japanese traders bet that the U.S. would raise interest rates sooner than expected.  Talk is circulating that the Swiss National Bank may end its currency selling program now that the Swiss economy has improved and inflation is steady.  The SNB had been systematically selling Swiss Francs to fight inflation.


December Gold traded in a volatile fashion all week but remained rangebound by the close.  The top of the range is $1072.00, the all-time high.  The bottom of the range is $1043.70.  The inability to make a new all-time high while the Dollar was hitting fresh 14-month lows is a sign that the selling may be greater than the buying at current levels.  The chart indicates that a secondary lower top may be forming.  This means that a break through the low end of the range will trigger an acceleration to $1028.80 over the near-term.


December Crude rallied to a new high this week, but erased some of the week’s gains with a poor showing on Friday.  Diminishing demand for higher risk assets helped drive down crude oil which has been driven up by speculation, higher equity prices and a lower Dollar.  Speculators have been buying crude oil in anticipation of a global economic recovery.  Short-term supply and demand factors indicate this market should be lower.  If equities break and the Dollar rallies, then look for a possible retracement to $73.50.

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