At least for the time being, investor appetite for risk seems to be stronger than the desire for safety, driving up U.S. equity markets ahead of the opening. This morning’s possible rally was tipped off yesterday when all three major futures indices posted daily closing price reversal bottoms.

Technically, the September E-mini S&P 500 chart indicates this market has room to retrace to 1097.00 before finding fresh sellers. The September E-mini NASDAQ is set up for a retracement rally to 1859.00. Finally the Dow could begin a retracement to 10433.

September Treasury Bonds failed to follow-through to the upside overnight, leading to some light profit-taking selling pressure this morning. Technically this market is overbought following the almost week-long meteoric rise after the Fed announced last week it was buying Treasury Bonds.  Don’t expect a change in trend, but do not be surprised by a healthy retracement to perhaps 130’01.

The U.S. Dollar is under pressure overnight as traders throw their support into the Yen, Euro, Swiss Franc and the commodity-linked currencies. On-going concerns over a slowdown in global growth continue to be the main catalyst behind the selling pressure.

With the Dollar giving back some of its gains from last week, investors are beginning to question if the current weakness is the start of another leg down or simply a retracement of last week’s rally. Traders seem to be a little confused as to which route to take today. On one hand, the rallies in the Japanese Yen and Swiss Franc suggest investors are seeking shelter in lower yielding currencies. On the other hand, the rallies in the Australian Dollar, New Zealand Dollar and Canadian Dollar indicate there is still appetite for risk.

Volatility is likely to increase over the near term as traders will eventually have to decide whether risk is on or risk is off.

The September Japanese Yen is trading flat to higher shortly before the New York session opening. The inability to follow-through to the downside after last week’s weekly closing price reversal top has all but taken the chance of an intervention off the table.

Technically, the Japanese Yen still has a chance to begin another attempt to breakout to the downside however. The overnight strength has created a new swing bottom at 1.1579 which means a breakdown under this level will turn the main trend to down on the daily chart.

Based on the short-term range of 1.1805 to 1.1579, the market has to begin establishing resistance at the 50%/62% retracement zone at 1.1692 to 1.1719 or buying pressure will overcome the selling and this pair will test or exceed the previous swing top at 1.1805.

Although the overnight price action penetrated the high end of this zone, a close under either 1.1719 or even better 1.1692 will be a strong indication that new sellers may have stepped up. This would put the market in a position to post a possible secondary lower top

On Monday the September Euro posted a daily closing price reversal bottom at 1.2732. Last night this reversal bottom was confirmed, setting up the possibility of a short-covering rally to 1.3033 to 1.3103.

Often after a hard sell-off from a major top, the market has a snapback rally to set up a secondary lower top. This occurs because the first break is usually dominated by longs bailing out. So another rally is needed to give traders an opportunity to put on fresh shorts. A rally back to 1.3033 to 1.3103 will give investors an opportunity to do so.

If this rally fails to materialize, then look for the downtrend to resume with an objective of the major retracement zone at 1.2608 to 1.2437.
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