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Stocks Erase Losses as Chicago PMI Report Boosts Optimism

James Hyerczyk from ForexHound.com at 12/30/09


U.S. stock indices reversed earlier weakness on the heels of a better than expected Chicago Purchasing Managers Index. Stocks were trading lower overnight and after the opening because of end-of-the-year profit-taking.

The March E-mini S&P 500 formed a closing price reversal top at 1128.50 yesterday. This pattern suggested a break to 1108.50 to 1103.75 was imminent. Last night’s follow-through to the downside confirmed the short-term top. This morning’s short-covering rally could find resistance at 1120.75 to 1122.50.

March Treasury Bonds are trading higher. End-of-the-year position evening is the catalyst behind the slight rise the last two days. Technically, holding above 115’08 is friendly and could trigger a short-covering retracement to 117’01 over the short-run. Longer-term, the threat of rising interest rates, oversupply of debt and a strong stock market should help to maintain downside pressure on the Treasuries.

The stronger Dollar is pressuring February Gold this morning. A new minor range has formed at $1075.20 to $1114.50. The retracement zone of this range is $1094.80 to $1090.20. Currently, the market is testing this zone. If it holds, then gold may attempt to rally through the last main top at $1114.50. Crossing this level will turn the main trend to up and trigger a rally to $1151.00. A failure to hold this zone will fuel a break to $1075.20.

March Crude Oil is trading a little better this morning. Bullish traders are trying to push this market higher in anticipation of greater demand because of the improving economy. Traders are waiting, however, this morning for the oil inventory report which is expected to show a drawdown. A bearish report coupled with the stronger Dollar could send March Crude Oil sharply lower to 76.82.

The March Japanese Yen fell sharply overnight, taking out the late October bottom at 1.0847, on its way to a three-month low. Concern over a potential bankruptcy filing by Japan Airlines is putting pressure on the Yen. Stories are also circulating that Japan’s AA rating is in danger of being cut if the country does not shore up its debt situation. Finally, traders are also factoring in potential action by the Fed in 2010 that will lead to higher interest rates and a stronger Dollar.

A contraction in Euro Zone money supply is pressuring the March Euro. This news was unexpected but could cause issues in the short-run as it could lead to a credit crunch. This is important to note because of credit problems in Greece, Spain and Portugal. So far the European Central Bank has not offered any aid to these regions. Tightening credit conditions could mean that the ECB may not be in a position to offer relief to these troubled regions if problems accelerate.

The March British Pound is under pressure this morning following yesterday’s reversal to the downside. Momentum is building which could keep pressure on this currency all day. Traders seem content with driving this market to the mid-October bottom at 1.5702. Investors are worried that the economy will remain weak over the near-term while the U.K. wrestles with a huge debt burden.

The March Swiss Franc confirmed yesterday’s closing price reversal top at .9734 when it took out .9633. The chart pattern suggests the next downside objective is .9628 to .9623. Traders are reacting to potential higher interest rates in the U.S. and the improving economy.

Weakening equity markets and lower gold is helping to pressure the March Canadian Dollar. Yesterday this currency pair formed a closing price reversal top which was confirmed overnight. The current chart pattern suggests a break to .9476 to .9435 is likely over the short-run.

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