Stocks Ignore Bullish Economic Data; Turn Focus on Risk

James Hyerczyk from ForexHound.com at 01/29/10

 

U.S. stock indices had enough information in today’s bullish GDP report to mount a strong rally, but concerns about the debt crisis in Greece and a poor outlook for technology stocks led to a late session sell-off.

 

If the situation in the Euro Zone continues to escalate and capture the bulk of the headlines, then look for investors to turn more risk averse.  This will underpin the Dollar but pressure stock indices and gold.

 

The robust GDP report should have pressured the March Treasury Bonds, but traders didn’t bite on the move, choosing instead to take safe positions. This market closed above a key 50% level at 118’24, putting it in a strong position to rally further to the .618 retracement level at 119’24. A flight to quality rally is likely to get triggered if concerns about Greece’s ability to cover its debt escalate.

 

Bonds rallied overnight but found resistance at a major 50% price at 118’24.  This level is still holding as resistance. Bearish traders want to see this price hold in order to attract more sellers who could eventually drive this market to the down side objective at 116’06. 

 

April Gold closed inside last month’s range but lower for the month. This pattern suggests impending volatility and an expanded range with a bias to the downside. The stronger Dollar, low inflation and the expected drop in demand from China is likely to trigger a sharp break to the downside.

 

The short-term pattern suggests that March Crude Oil contract is trying to establish support near the December bottom at 72.53. Longer-term charts indicate a break to 65.38 is possible. Bullish oil traders got a better than expected GDP figure on Friday, but couldn’t hold on to early gains. This report indicates the economy is expanding, but not enough to trigger an increase in demand.

 

The U.S. Dollar closed out the month of January sharply higher as aggressive buyers helped the Greenback surge to the upside following Friday morning’s better than expected U.S. GDP report. The report which blew out forecasts encouraged traders to buy with both hands as investor sentiment turned more optimistic toward a strong U.S. economic recovery.

 

Earlier in the week, the Dollar was bolstered by a more upbeat statement by the Federal Reserve. Although the FOMC left interest rates unchanged, it did change its outlook on the economy from “weak growth” to “moderate growth”.  The markets responded by driving up the Dollar in anticipation of higher interest rates and a much better outlook for the economy going forward.

 

Most of the time this week, the Dollar showed strength as investors became more optimistic about the U.S. economy, but demand for safety because of concerns over sovereign debt issues in Greece and Portugal also contributed greatly to the rally.  These problems are likely to linger over into next week and until a viable solution is reached.

 

The March Euro finished the month sharply lower and in a position to test 50% of last year’s July to November rally.  The main range is 1.2329 to 1.5144 with retracement levels at 1.3800 to 1.3483. The combination of an improving U.S. economy and concerns over sovereign debt issues in Greece and Portugal pressured the Euro. Look for this down trend to continue until this market becomes oversold or until Greece and the European Union reach a solution on how to shore up the Greek budget.

 

The March British Pound closed slightly lower for the month. The lack of growth continues to plague the U.K. economy.  On Friday, the Pound finished sharply lower following a robust U.S. GDP Report. The long-term chart indicates that this market may be vulnerable to a correction back to 1.5271. Watch for an acceleration to the down side to begin following a break down under 1.5706.

 

The March Japanese Yen finished the week slightly lower, but gained ground for the month. Renewed strength in the U.S. economy helped the Dollar rise sharply over the Yen on Friday. For the month, this currency traded between two 50% levels at 1.0815 to 1.1217.  A breakout over either one of these prices in February is likely to trigger a big move.  At times, the Yen showed weakness because of improvements in the U.S. economy.  Other times, the Yen strengthened when investor sentiment shifted toward safety. Something is going to have to give soon.  Either investors are going to sell the Yen hard as the economic outlook for the U.S. improves, or the Yen will rally sharply higher if traders turn more risk averse.

 

The March Swiss Franc turned the main trend to down on the weekly chart, following a breakdown under .9522.  In addition, this market posted its second consecutive lower month and now appears to be on pace for a break to .9152.  Not only was the strengthening Dollar softening the market, but the weakening Euro versus the Swiss Franc also helped to trigger concerns that the Swiss National Bank was getting ready to intervene.  One of the main concerns for the SNB is its appreciation versus the Euro.  In this case, the sovereign debt issues in Greece and Portugal have helped weaken the Euro enough to make the Swiss France look strong.

 

The monthly March Canadian Dollar chart formed a closing price reversal top which indicates the possible start of a huge break to the downside. This type of pattern usually suggests the formation of a major top.  In addition, following the formation of this pattern the market breaks 50% of the last rally over a 2 to 3 month period.  This projects a possible move to .8765 by April.  The stronger U.S. economy coupled with weaker crude oil and gold prices is not very supportive for the Canadian Dollar.  In January, the Bank of Canada reiterated its stance against a stronger currency and vowed to take whatever action it deemed necessary to prevent a strong currency from derailing the economic recovery.