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Stocks Finish Weaker but Investors Continue to Support the Dips

James Hyerczyk from ForexHound.com at 01/21/10


U.S. equity markets closed lower as investors dumped higher risk assets, but buyers once again stepped in on the intra-day dip.  Wednesday’s weakness started on the Shanghai Exchange overnight after China asked banks to stop lending for the rest of the month.  This sent a signal to traders that the easy money environment would be coming to a close. Investors reacted as if the news from China would curtail the global economic recovery.


Good news from IBM couldn’t carry the market and by the opening IBM was leading the Dow Jones Index lower. The news that Republican Brown defeated the Democratic machine in Massachusetts may have put additional pressure on the markets. According to some analysts, healthcare stocks could feel pressure, but insurance stocks may gain. The stronger Dollar is likely to send investors into lower yielding assets. 


Investors continued to look at weakness in the markets as buying opportunities. The strong comeback from earlier lows suggests the indices may take another run at the highs. Until major support is broken on the longer-term charts, expect this pattern to continue.


March Treasury Bonds and Treasury Notes moved higher as yields fell to their lowest levels since December.  Traders drove down yields as they sought shelter from falling equity and commodity markets. If safety remains the theme over the near-term, then look for more appreciation in bonds and notes. This up move could be short-lived, however.  There are some concerns brewing that China may a smaller participant in the upcoming Treasury auction.


February Gold closed sharply lower.  Stronger demand for the Dollar put pressure on gold. Traders also felt that there was less of a need to hold on to gold as a hedge against inflation. Both a retracement level at $1119.10 and an old main bottom at $1118.50 failed to hold as this market plunged further to a .618 level at $1108.80 before finding some light support at $1106.80. News that China is asking banks to limit loans could mean the end for excessive demand for precious and industrial metals.


March Crude Oil finished lower after it failed to follow-through to the upside after Tuesday’s closing price reversal bottom.  The pattern wasn’t negated, but there doesn’t seem to be enough buying power to confirm a valid bottom.  Currently this market is trading inside a retracement zone at 78.99 to 77.70.  A slowdown in demand from China could put pressure on this market the rest of the week.  76.00 is the next potential downside target.  Thursday’s supply and demand report could be a market mover.


The U.S. Dollar advanced sharply higher on Wednesday, buoyed by the news that China was reigning in bank loans in an attempt to cool off the economy.


The availability of easy money through government stimulus and favorable loan conditions helped fuel a huge surge in the Chinese economy. The pace of the growth is a concern for central bank officials.  On Thursday, China is expected to report double-digit 4th quarter GDP growth.


The Dollar also received a boost from the election of a Republican to a key U.S. Senate seat in Massachusetts. This event is bullish for the Dollar because some feel it may signal an end to excessive government spending that has been weakening the Greenback.


The combination of China’s aggressive tightening action along with the Republican victory boosted the Dollar while putting pressure on equities and commodities.


The March Euro continued its five-day freefall on concerns over Greek budget issues.  The problems in Greece have triggered an international reaction. On Wednesday, International Monetary Fund Managing Director Dominique Strauss-Kahn said Greece’s debt woes are “serious”.  Without any aid from the European Union, or the European Central Bank, look for Greece’s debt issues to continue to mount leading to possible talk of default.


European officials have stood there ground about providing financial help to Greece, saying that it is not their problem to solve. They also fear that providing aid will mean other countries such as Spain, Portugal and Ireland will begin lining up with their hands out in expectations of free money. 


The March British Pound traded sharply lower before settling near mid-range. Overnight Bank of England Governor Mervyn King issued a dovish comment about Tuesday’s higher than expected inflation report, but his comments were offset by more hawkish comments generated from the Bank of England minutes. The move to the downside was also softened after a report showed that the U.K. unemployment rate fell at the fastest pace since April 2007 in December.


Although the British Pound failed to form a closing price reversal top on Tuesday, it sold off, nonetheless, when a 50% support price at 1.6355 was violated. The chart indicates that 1.6175 is the next downside target.


China’s order to curtail bank loans is likely to lead to a slow down in global economic growth while putting pressure on higher yielding assets. This should have helped support the March Japanese Yen, but trading was lackluster and sideways. Traders do not seem to know whether to buy the lower yielding Yen or the Dollar.  The chart indicates traders are leaning toward the long side of the Dollar with 1.0851 the next downside target.


The March Swiss Franc continued to weaken after it broke through a key retracement price and an uptrending Gann angle.  The break in the Euro is making Swiss central bankers nervous which could lead to a surprise intervention. 


On Tuesday, the Bank of Canada left interest rates unchanged, but took measures to weaken the Canadian Dollar by increasing its asset-buyback program.  Weaker stocks, gold and crude oil put additional pressure on the March Canadian Dollar today.


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