Stocks Falter but Manage to Hold on to Gains

James Hyerczyk from ForexHound.com at 12/29/09

U.S. equity futures weakened after an early session surge but managed to eke out a small gain. Overnight strength was fueled by greater demand for higher yielding assets while the early morning rally was triggered following the release of a report showing a rise in consumer confidence. Thin trading conditions and the lack of buyers were the driving forces behind this afternoon’s weakness.

Global stock prices rose overnight following a sell-off in the Dollar, signaling greater demand for higher yielding assets. The thought of a recovery in the U.S. economy also contributed to the early strength.

Treasuries finished higher following early morning weakness. March T-Bonds picked up strength late in the session when the market regained a key 50% level at 115’08. Today’s strong close has the market in a position to follow-through to the upside tomorrow. The next potential upside target is 116’05.  

February Gold fell sharply as the Dollar strengthened following the release of the friendly U.S. Consumer Confidence figure. Thin, conditions due to the shortened trading week ahead of the New Year’s holiday are also helping to keep bullish traders on the sidelines. Regaining a key 50% level at $1107.40 could trigger a short-covering rally later in the day.  Buyers may come in tomorrow at $1094.80 to $1090.20.  The reaction at this price level all depends on the direction of the Dollar.

March Crude Oil backed off from early highs but managed to close higher. The key number that has to hold is 79.27.  A break below this level will be an indication that the market is overpriced. Technical factors are indicating this market has hit overbought levels.

The U.S. Dollar managed to hold on to its gains after erasing earlier losses following the release of a friendly Consumer Confidence report. Although the reported figure of 52.9 was slightly less than estimates, it still reflected continuing strength in the economy.  This morning the S&P/Case Shiller report on home prices was flat. There was almost no reaction to this report by Forex traders. Expect more of the same trading tomorrow as major players remain absent during the holiday week.

The Dollar was down overnight as traders took advantage of the thin, holiday trading by taking profits after the almost month-long rally.  Demand for higher yielding assets also contributed to the weakness for the second day in a row buoyed by a rise in global equity markets. Finally, some of the selling pressure can be attributed to concerns over rising debt in the U.S.

The March Euro finished lower after giving up early gains. The friendly U.S. Consumer Confidence report erased overnight gains triggered by a report showing rising prices in Germany.

The March British Pound traded in a wide range on Tuesday with a strong bias to the downside. Overnight the British Pound rallied as traders returned to work after an extended holiday break. The market was unable to hold on to its gains, however, and retreated to the downside.  Investors are still concerned about the U.K. budget deficit and struggling economy.  Sellers hit the market hard following the release of the U.S. Consumer Confidence figure. The selling pressure took out three days of lows and negated the thought that a support base was being built.

The March Japanese Yen broke out to the downside of its tight range on the daily chart on the heels of a rise in U.S. Consumer Confidence. Demand for higher yielding assets also contributed to the Yen’s weakness. Japanese investors seeking higher yields sold Yen to buy U.S. Treasuries.

The March Swiss Franc regained the old bottom at .9675 following an overnight acceleration to the upside through this level. This put the market in a weak position once again following seven days of strength. Signs of a U.S. economic recovery are helping to strengthen the Dollar. Watch for a quick break back to .9628 over the near-term.

The rally in the March Canadian Dollar came to an end on Tuesday as early gains were erased following the release of a friendly U.S. Consumer Confidence report. Last night’s trading action took out a main top at .9609 to reaffirm the uptrend.  Falling back below .9574 could trigger additional weakness. Today’s closing price reversal top could trigger a short-term retracement to .9477.