Friendly U.S. Economic Reports Underpin Stocks

James Hyerczyk from ForexHound.com at 12/25/09

Traders looking for pre-holiday selling pressure in the equity markets today received a surprise when better than expected initial claims and durable goods reports helped underpin the markets while driving prices to their highest levels this week.

Treasuries continued to weaken.  March Treasury Bonds and Treasury Notes sold off following the better than expected initial claims and durable goods reports. Signs of an economic recovery should continue to provide upside pressure on yields as traders price in the strong possibility the Fed will hike interest rates sooner than expected.

The U.S. Dollar finished lower against a basket of currencies under thin, pre-holiday trading conditions.  Today’s weakness could have been worse had it not been for better than expected initial claims and durable goods.  Both reports signaled an improving economy.

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 this week is that sentiment is shifting away from risk-based decision making to more fundamentally driven decision making.  The rally on Tuesday, Wednesday’s weakness and today’s action 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.  Thursday’s reports helped stop a possible sharp decline.

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 finished a little better.  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 continued to push the March British Pound lower, but short-term traders should watch for a possible retracement 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 after a huge run-up the past five days helped to pressure the Dollar against the Japanese Yen, but better than expected economic news limited losses.  Attractive yields and improving economic conditions should continue to help the Dollar rise versus the Yen after the holiday.  Look for bullish traders to re-enter the long side after prices retrace slightly.  Downside momentum should then take this market to the October low at 1.0847.

Oversold conditions and end-of-the-year profit-taking helped to rally the March Swiss Franc this week.  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 provided resistance at .9710.  The technical bounce to the downside following a test of this level this morning proved its importance. A failure to hold this angle could trigger further strength.

The March Canadian Dollar continued to erode resistance overnight but sellers came in when this currency hit the upper end of the retracement zone at .9574. A technical bounce could drive this market back to .9505 to .9446. Investors have been repositioning themselves in anticipation of an improving Canadian economy.  Traders feel that an improving U.S. economy will help better the Canadian economy at a faster pace than previously estimated.  After testing the lower-band of a wide trading range at .9363 on December 17th, 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 mounted a comeback while erasing almost all of this week’s losses.  This market found 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.  This market appears to be ready to launch a rally to $1151.35 before another new lower top is formed.

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 broke through a 50% price level at 77.99 and a downtrending Gann angle at 78.09. This indicates that this rally is more than short-covering.  Look for a further rally to 79.27.