Overnight action indicates a slight reversal in yesterday’s direction. Although it is too early to represent a change in trend to down or even an indication of a serious top, equity, currency, and commodity markets are called lower this morning while Treasuries and the Dollar are expected to open higher.
Profit-taking is the most likely reason for the decline in equity prices overnight. These markets have had a tremendous run since the second week in July and are due for a much deserved breather. Some traders feel that it is time for the S&P 500 to take over the leadership of this tech driven rally. A two to three day break in the trading action may allow this shift to take place.
The September E-mini NASDAQ is the market to watch for clues as to how deep the developing break may cut. The almost 4-week rally in the NASDAQ has taken place with a series of daily higher-highs. One important clue that this market is forming a short-term top will be the taking out of the previous day’s low.
Overnight weakness in the equity markets is leading to the call for a better opening in September Treasury Bonds and Treasury Notes. Last week both of these markets produced closing price reversal bottoms. Although both are highly unlikely to confirm their reversal bottoms with a follow-through rally through last week’s highs unless the stock market drops sharply lower, last week’s action does indicate sustained buying interest.
Less demand for risky assets is leading to a recovery in the U.S. Dollar and September Japanese Yen overnight. Today’s expected weakness will allow the September British Pound, September Euro and September Canadian Dollar an opportunity to cool off after a tremendous run to the upside since last week. With the Bank of England and the European Central Bank meeting on August 6th, do not be surprised if the Pound and Euro revert to a sideways trade until the central bank meeting results are released. Preliminary thoughts are for the BoE to leave rates unchanged and to drop its asset buyback program while the ECB will most likely turn hawkish in its commentary.
The rally in the metals complex is also expected to show signs of cooling before it retools for another rally. December Gold and September Silver are called lower this morning because of the stronger Dollar. September Copper has reached an overbought level and a key retracement zone which should curtail gains and apply downside pressure.
Energy markets are also called lower. Traders are still worried that the current supply and demand scenario cannot support crude oil prices at current levels. Although a weaker Dollar and demand for higher risk assets supported the recent run-up in prices, many traders feel that speculators may have driven this market too far too fast over the short-run.
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