Equity Market Support Continues to be Threatened

James Hyerczyk from ForexHound.com at 01/19/10

U.S. equity markets are trading overnight and are expected to open slightly above near-term support.  The March E-mini S&P 500 broke an uptrending Gann angle at 1132.25 which has held as support since November 27th.  This is a sign of impending weakness. Short-term support is a retracement zone at 1129.00 to 1124.50.  Once this zone is broken, the next downside targets will be 1105.00 and 1095.00.  The fear of higher interest rates is helping to shift sentiment out of higher risk assets.

The short-term trend is up in the March Treasury Bonds, but the market appears to be stalling inside of a retracement zone at 116’28 to 117’14.  Last night’s attempt to breakout to the upside appears to be failing, setting up this market for a potential closing price reversal top.  For a while, the strategy used by traders has been sell bonds and buy stocks, but recent action suggests that this strategy may be shifting.  Traders should be aware that it is possible that the threat of a rise in interest rates could pressure both equities and fixed income instruments.  As the government begins to pull stimulus measures which have artificially kept interest rates low, investors are going to have to begin pricing in a true interest rate.  Heavy Treasury debt and new corporate debt could trigger a spike in interest rates because of oversupply. 

The strength in the Dollar is helping to pressure February Gold today, although this market has traded sideways for the past four days.  A shift in momentum to the downside could trigger a break to $1119.10 to $1106.80 over the near-term. News if higher interest rates in China and a possible end to stimulus plans could mean less demand for raw materials.  This is also putting pressure on precious and industrial metals.

March Crude Oil is also under pressure because of the strengthening Dollar and a potential drop in demand from China.  Speculators have taken the weather premium out of the crude market which means a further decline is possible as the market is likely to return to the pre-cold weather price area.  Currently, March Crude Oil is trying to establish support inside of a retracement zone at 78.99 to 77.70.  Regaining the top end of this zone could trigger a short-covering rally to 80.95.  A failure to hold the lower end of the zone indicates acceleration to the downside is likely.

A drop in global equity markets is helping to boost the Dollar as traders shift out of higher yielding assets. The Dollar started out weaker overnight as traders returned after a U.S. holiday, but it turned higher on technical factors and surprise economic data from competing nations. Shortly before the opening, the Dollar is trading higher versus most major markets except the British Pound. This could shift as overnight downside pressure on the Pound seems to be building.

The March Euro continues to take a pounding as European finance ministers prepare to discuss Greece’s debt problems.  Fears of a potential Greece default and additional credit market woes in Spain, Portugal and perhaps Ireland are weighing on the Euro. 

Traders expect the European finance ministers to hold their ground and maintain that Greece solves its own problems. This could be an indication that this problem will persist as Greece is having problems reaching a budget decision. 

News that German investor confidence declined more than expected is helping to draw additional selling pressure.  Speculators are beginning to price in the possibility the Euro Zone economy may be stalling.  This report could be proof that the Euro Zone recovery is falling behind the other major economies.

Technically, the March Euro is finding resistance at downtrending Gann angle resistance at 1.4404.  Overnight, the market failed to hold a retracement zone at 1.4386 to 1.4346, which indicates further weakness is likely.  This area is likely to act as a pivot zone over the near-term.

The March British Pound originally soared to the upside on the news that Kraft was about to acquire Cadbury PLC. The news of the acquisition originally drew bids from British Pound traders who helped maintain its early upside bias.  The violation of key technical resistance levels also helped to send the market higher.  This was most likely a follow-through rally following yesterday’s improving U.K. housing report. 

Overnight, the British Pound pierced a 50% resistance level at 1.6355, but fell short of a test of the .618 level at 1.6478.  Additional resistance was provided by downtrending Gann angle resistance at 1.6438. 

Higher than expected consumer inflation helped drive the British Pound lower after an initial spike following the release of the report. Today’s report showed that inflation had accelerated at a record pace.  It also was proof that the Bank of England stimulus plan is working, and that there is no need for further stimulus measures.  The BoE stimulus activity did its job but stopping the threat of inflation, but has helped put inflation back on the agenda.   

Technically, the overnight action in the British Pound has put this market in a position to post a daily closing price reversal top. All that is needed is a lower close, and the March British Pound will be set up for a substantial break to the downside.  Preliminary chart work suggests there is room to correct to 1.6176 over the near-term.