Thin Holiday Trading; Profit−taking Likely to Pressure Stocks

James Hyerczyk from ForexHound.com at 12/24/09

Despite the higher equity markets overnight, the lack of upside momentum is making traders leery of a possible short-term profit-taking correction ahead of tomorrow’s holiday. Weakness in the Dollar could help to trigger a sell-off.

Treasuries are trading flat to better. March Treasury Bonds and March Treasury Notes are trying to recover after a hard sell-off this week.  Selling pressure should resume after the holiday as traders are beginning to price in the possibility of an interest rate hike in 2010. Aggressive buying by Japanese investors helped to drive up yields earlier in the week.

The U.S. Dollar is trading lower overnight under thin, pre-holiday selling pressure.  Although it is difficult to gauge the actual reasons behind the weakness, it’s easy to speculate that the huge run-up in the Dollar the past few weeks is making it ripe for profit-taking.

The most important thing that traders should take away from these markets at this time is that sentiment is shifting away from risk-based decision making to more fundamentally driven decision making.  The rally earlier in the week and yesterday’s weakness are prime examples.  For example, traders drove up the Dollar on good existing home sales news on Tuesday while driving it lower on poor new home sales on Wednesday.  Moving forward into the new year, it is important to note that volatility is likely to rise in the short-run as speculators and investors adjust to a new way to make trading decisions.

The March Euro is up again overnight.  The chart pattern suggests a possible weekly reversal up.  In addition, this currency pair could complete a 50% retracement to 1.4680 before new sellers step in.  Debt issues in Greece, Spain and Portugal could rear up at anytime which could trigger fresh selling pressure.

Bearish pressure is likely to continue to push the March British Pound lower, but a short-term retracement may have to occur before fresh selling pressure begins.  The slow growth in the economy and the U.K. budget deficit remain the biggest reasons for the weakness.

Profit-taking and short-covering after a huge sell-off the past five days is helping to strengthen the March Japanese Yen.  Attractive yields and improving economic conditions should continue to help the Dollar rise versus the Yen after the holiday.  Look for bearish traders to re-enter the short side after prices retrace slightly.  Downside momentum should then take this market to the October low at 1.0847 following the retracement rally.

Oversold conditions and end-of-the-year profit-taking is helping to trigger a short-covering rally in the March Swiss Franc.  Following a huge break to .9522, this currency pair has now retraced back to the old main bottom at .9675.  In addition, downtrending Gann angle resistance is providing resistance at .9710.  A failure to hold this level could trigger further upside action.

The U.S. Dollar continues to erode versus the Canadian Dollar as traders reposition themselves in anticipation of an improving Canadian economy.  Traders feel that an improving U.S. economy will help improve the Canadian economy at a faster pace than previously estimated.  After testing the lower-band of a wide trading range at .9363 six days ago, this currency pair is now testing the upper end at .9574.  The most important price to watch is .9609.  Speculators have also been pricing in the possibility of an interest rate hike more sooner than expected.

February Gold is mounting a comeback and is now in a position to erase this week’s earlier losses.  This market is finding support at a .618 retracement level at $1079.00.  Resistance is at a 50% price at $1107.40 and a downtrending resistance level at $1107.50.  Thin trading conditions could trigger an upside breakout over this level.  Look for this to occur if the Dollar weakens further.

The main trend turned up on the daily March Crude Oil chart.  This is the first time since early November that the main trend was up.  This market has already retraced 50% of the entire break from 83.44 to 72.53.  This price is 77.99.  Downtrending Gann angle resistance is at 78.09.  The weaker Dollar and improving economy is leading to speculation that demand may begin to rise.