S&P Posts Daily Reversal Top
James Hyerczyk from ForexHound.com at 12/02/09
Wednesday’s weaker than expected ADP Report for November helped contribute to today’s drop in demand for higher risk assets. This led to a stronger Dollar as traders sought safety in the U.S. currency while reducing exposure in riskier stocks and commodities.
Later in the afternoon, trader focus shifted to the Fed’s Beige Book. This report did not reveal anything new about the economy, and basically confirmed that the economy is on the road to recovery albeit a rough path. The report also backed the Fed’s decision to keep interest rates low for a prolonged period of time.
The December E-mini S&P finally broke through the November top at 1112.25, triggering stops all the way to 1115.50 but could not attract any buyers on the breakout and finished lower. The first clue that this rally was going to fail came from watching the Dollar. The Dollar remained firm when the S&P rallied. This divergence caused the buying in the stock market to dry up. The closing price reversal top which was formed today often leads to a 2 to 3 day break. A break through 1104.25 is likely to trigger an acceleration to the downside.
Weaker equity markets helped give the lower yielding March Treasury Bonds a boost. Overnight key support at 121’06 held. If the stock market weakens tomorrow then look for the T-Bonds to rally back to at least 122’02 to 122’09 over the short-run.
The Japanese Yen traded lower all day after a Bank of Japan official expressed his concern about the rise in the currency. The Yen could remain under pressure for some time as traders digest whether the BoJ will intervene.
The Dollar Index finished higher and gained strength throughout the day following the weaker than expected ADP employment report. Perception that the U.S. economy is still weak, encouraged traders to lighten up demand for higher yielding currencies. Last week’s low at 74.27 is still holding. A break through this level is likely to trigger a further decline to the April 2008 bottom at 73.67.
The December Euro failed to overtake $1.51, but held the psychological $1.50 price. Traders flattened positions ahead of tomorrow’s European Central Bank meeting. The ECB is expected to leave interest rates unchanged and offer guidance as to how it is going to reduce government stimulus.
The December British Pound took out a key retracement level at 1.6646 last night but failed to hold on to its early gains. New support has been established at 1.6575. It is possible this currency is forming another lower top.
The December Swiss Franc trader weaker on Wednesday as it fell back below par with the Dollar. Overbought conditions and the possibility of an intervention may have encouraged the selling pressure in addition to less demand for higher risk assets.
Weaker equity markets and a lower crude oil market helped drive the December Canadian Dollar lower. The chart pattern suggests a range bound market is developing.
February Gold rallied to a new high at 1218.40 overnight but failed to exceed this level during the day trading session. This is an indication that the speculative buying is coming from Asia or Europe. Gold was able to hold on to its gains despite a stronger Dollar. Don’t be surprised if the new longs get trapped up at current levels if the Dollar rallies sharply higher overnight.
Wednesday’s EIA report indicated that oil inventories had risen more than expected. This negative news confirmed Tuesday’s bearish American Petroleum Institute Report which showed that inventories rose 2.9 million barrels. March Crude Oil traded lower throughout the day on this news. Lower equity prices and a firmer Dollar also helped to pressure this market.
