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Stocks fall as Traders Seek Safe−Haven Investments

James Hyerczyk from ForexHound.com at 12/18/09


U.S. stock markets traded hard to downside on Thursday fueled by fears of a financial crisis in the Euro Zone.  Stocks began their sell-off last night following a downgrade of Greece’s debt by the S&P credit rating service.  The markets accelerated to the downside shortly after the U.S. opening partly on a higher then expected initial claims figure.


Traders for the most part sought refuge in safe haven investments such as the U.S. Dollar and Treasury instruments.  Although no significant damage was done to the charts, the tone of the market seems to be shifting to more down beat, which could be an indication of further weakness to follow.


March Treasury Bonds surged to the upside as they were the recipient of funds being pulled from the equity markets.  Traders fearing an end of the year meltdown in equities increased demand for a safe haven investment.  Yesterday the Fed’s statement signaled an end to cheap money, causing yields to rise, but investors ignored this news today. 


The overnight downgrade of Greek debt should linger in the market for a few more days as investors try to figure out which other Euro Zone nations will suffer the same fate.  At this time the debt crisis is being contained within a few countries but can easily move to the Euro Zone and in turn jump to the U.S. financial system.  Investors have learned from past mistakes and are reacting to the smell of smoke rather than waiting for the fire.


The stronger Dollar sent February Gold sharply lower.  Gold took out a major 50% retracement price before stopping near uptrending Gann angle support at $1098.00.  Downside momentum indicates that the Fib retracement level at $1079.00 is the next downside target. With inflation almost non-existent according to the Fed and the Dollar at a 3-month high, there doesn’t seem to be much in the news that could turn this market around.


March Crude Oil reversed earlier strength and finished lower for the day.  The failure to hold a key 50% level at 75.53 triggered some of the selling today.  Most of the break, however, was attributed to weaker stocks and a stronger Dollar. Crude oil was able to find support near a .618 retracement level at 73.63.  Short-covering triggered a mild rally and the market closed inside of the retracement zone at 73.63 to 75.53.


The U.S. Dollar reached a three-month high today.  The strong surge to the upside was fueled by the S&P’s downgrade of Greece’s credit rating.  This strong rally started last night but gained strength throughout the day on the possibility of more downgrades of Euro Zone sovereign debt. Investors treated the Dollar as a safe-haven investment on the fear that the spread of bad debt throughout the region could trigger serious banking issues, curtailing the current economic recovery.


The March Euro took out a major 9-month uptrending Gann angle as well as a minor .618 level overnight and accelerated to the downside.  Both fundamental and technical factors contributed to today’s weakness. Look for the downside momentum to continue unless the European Central Bank steps up to defuse the growing debt crisis by freeing up liquidity.


The March British Pound sold off today because of a disappointing retail sales report.  This news overwhelmed Wednesday’s better than expected jobless claims data.  Technically, the British Pound failed to hold retracement zone support and is now trading on the weak side of a 3-month 50% price at 1.6292.  The chart indicates this market is vulnerable to a further decline to 1.5941.


Falling gold prices and the weakening stock market pressured the Canadian Dollar throughout the New York trading session. Technically, the March Canadian Dollar broke out to the downside on the move through .9363.  The next downside target is a swing bottom at .9094 on the weekly chart.


Demand for higher yields, an improving economy and the reversal of the carry trade helped trigger a sharp break in the March Japanese Yen.  It is possible that a sharp sell-off in the equity markets tomorrow could lead traders to the safety of the lower yielding Yen. This would trigger a rebound in the currency.


Demand for the U.S. Dollar and debt problems in the Euro Zone helped to pressure the March Swiss Franc.  Traders are factoring in the possibility that Swiss banks face exposure to debt issues in Greece, Portugal and Spain. Unless something is done to defuse the growing fear that a debt crisis is developing, the Swiss Franc could deteriorate further. In addition, a collapse in the gold market could put additional pressure on this market.

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