Stocks rallied overnight after the Australian economy showed more than expected second quarter growth and China’s PMI was reported stronger than estimated. Both reports triggered a surge in demand for higher risk assets overnight which led to the sharp rise in equities.

U.S. equity markets traded sideways to lower for several hours before this morning’s lower than expected ADP report. The headline news appeared to be bearish but stocks tested the earlier high for the day anyway before starting a slight sell-off. The real test this morning will be whether U.S. investors chase this market higher or wait for a pullback ahead of Friday’s Non-Farm Payrolls Report.

The September E-mini chart pattern suggests that there is room to rally to 1077.25 over the near-term, but the question remains will U.S. investors take a side in this market ahead of Friday’s jobs data or will last night’s and this morning’s reports be enough to scare shorts out of their positions.

Demand for risk is pressuring the Treasurys this morning. The September T-Bonds briefly cut losses after the ADP report, but yields remained higher.

Tuesday Recap

Investors sold off U.S. equities shortly after the Fed released its August Federal Open Market Committee meeting minutes but short selling dried up a little under a key short-term retracement zone. Thin trading conditions triggered a huge short-covering rally into the closing bell.

After a strong surge to the upside on the opening, the September E-mini S&P 500 began to weaken as bullish traders remained on the sidelines ahead of Friday’s U.S. employment report and Monday’s Labor Day holiday.

In its Minutes, the Federal Reserve said the outlook for the economy would have to deteriorate “appreciably” to spur fresh stimulus from the central bank. This statement didn’t sit well with investors who sold off the market into a retracement zone at 1046.00 to 1044.00. Downside momentum actually took out this zone but the daily chart uptrending Gann angle at 1042.75 stopped the break.

With all the sellers out of the way, bottom pickers gained control, triggering a strong short-covering rally into the close.

Thin conditions are likely to lead to volatility on Wednesday especially after the ADP employment number, but the market may settle into a range for the duration of the session.

The way of least resistance is down and this market looks vulnerable to the downside. It seems like just a matter of time before the bottom falls out.  Low volume and thin trading conditions could be helping to prevent a sharp sell-off at this time. Tuesday’s late short-covering rally may also make bears think twice about shorting the Spoos in the hole. This means that another short-covering rally is possible before the next shorting opportunity arises.
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