Short−Covering Rally Triggers Late Surge in Equities

James Hyerczyk from ForexHound.com at 12/31/09

U.S. equity markets finished higher after a mid-session break threatened to take the markets lower into the close. Stock indices reversed earlier weakness on the heels of a better than expected Chicago Purchasing Managers Index, but failed to maintain the upside momentum sending them lower at the mid-session.  The catalyst behind the mid-session weakness appears to be end-of-the year profit-taking.  The lack of selling pressure into the close triggered a short-covering rally which took the stock indices higher for the day.

March Treasury Bonds closed higher. End-of-the-year position evening has been the catalyst behind the slight rise the last two days. Technically, holding above 115’08 is friendly and could trigger a short-covering retracement to 117’01 over the short-run.  Longer-term, the threat of rising interest rates, oversupply of debt and a strong stock market should help to maintain downside pressure on the Treasuries. Despite the increase in Treasury debt this week, traders have had very little reaction to this potentially bearish news.

February Gold closed lower for the day, but inside of a key retracement zone at $1094.80 to $1090.20. The stronger Dollar pressured February Gold this morning, but the turnaround in the Dollar at the mid-session led to a short-covering rally in gold. The current chart pattern suggests that the main trend will turn up when the market crosses $1114.50.

March Crude Oil closed higher following a report which showed inventory had dropped.  Bullish traders are trying to push this market higher in anticipation of greater demand because of the improving economy.  A weaker Dollar could trigger more upside action.

The U.S. Dollar finished higher after a choppy trading session but well off its high. The Greenback opened higher after global equity markets weakened following an overnight drop in demand for higher risk assets. The Dollar surged to its high for the day against most major currencies after the release of a better than expected Chicago PMI report. 

This report signaled that the U.S. economy was recovering from the recession.  After the early morning rush to a new high, buying fizzled as traders began to take year-end profits. The Dollar finished higher, but downside momentum is building which lead to a lower opening tomorrow.

The March Japanese Yen accelerated to the downside, taking out the late October bottom at 1.0847, on its way to a three-month low.  Concern over a potential bankruptcy filing by Japan Airlines is putting pressure on the Yen. Stories are also circulating that Japan’s AA rating is in danger of being cut if the country does not shore up its debt situation.  Finally, traders are also factoring in potential action by the Fed in 2010 that will lead to higher interest rates and a stronger Dollar. Pre-holiday profit-taking triggered an intra-day correction but the market was able to hold on to its gains. Continue to look for the Japanese Yen to weaken unless there is an unexpected shift in the fundamentals.

A contraction in Euro Zone money supply pressured the March Euro early in the trading session. This news was unexpected but could cause issues in the short-run as it could lead to a credit crunch.  This is important to note because of credit problems in Greece, Spain and Portugal.  So far the European Central Bank has not offered any aid to these regions. Tightening credit conditions could mean that the ECB may not be in a position to offer relief to these troubled regions if problems accelerate. Going into the close, the Euro mounted a strong comeback as profit-takers stepped in ahead of the New Year’s holiday, but still managed to close lower for the day.

The March British Pound started out under pressure this morning following yesterday’s reversal to the downside, but turned around shortly after the opening to close higher for the day. Investors are worried that the economy will remain weak over the near-term while the U.K. wrestles with a huge debt burden. The lack of major news pointed toward technical factors as the catalyst behind today’s the turnaround. Relative Strength and the Stochastics Oscillator indicate this market may have reached oversold levels.

The March Swiss Franc confirmed yesterday’s closing price reversal top at .9734 when it took out .9633.  The chart pattern suggested the next downside objective was .9628 to .9603.  Intraday activity took this market into the retracement zone where traders took profits. This helped the Swiss Franc turn positive for the day at the mid-session. Going into the close, buying pressure was subsiding and the market was hovering around break-even.

Weakening equity markets and lower gold helped to weaken the March Canadian Dollar early in the trading session, sending this currency pair into a key retracement zone at .9476 to .9435. Profit-takers decided to take action in this zone, triggering a slight rally at the mid-session.  Look for the Canadian Dollar to rally over the near-term if gold strengthens and equities weaken.