U.S. equity markets are trading flat to better several hours before the New York session opening, but this could change because of the release of the U.S. Retail Sales Report. This report which is due out at 7:30 a.m. central is expected to show an increase of 0.2% versus the prior month’s gain of 0.4%.
One of the market drivers this week has been talk that the global economic recovery is back on track. This report will certainly offer a clue as to whether or not this conclusion is valid. A better-than-expected report will also take away some of the sting left over from last Friday’s disappointing employment report.
June Michigan Sentiment will be reported at 8.55 a.m. this morning. Traders are looking for an increase from 73.6 to 74.5. The estimate for this report, which measures consumer attitudes, seems to be a little high given the current employment situation and the drop in the stock market.
Although investors are expected to react to these reports, their main concern remains risk exposure. Risk sentiment has been driving this market and creating the volatile swings as investors have been putting on risk and taking it off for the past several weeks. Essentially, the swings of the market are related to what is going on in Europe. If optimism prevails, then look for stocks to rise. Any hint of renewed debt problems will trigger fresh selling however.
The current rally has most likely been triggered by short-covering. Let’s face it, the past few weeks, the trend shifted to down as investors began shorting the market on rallies. In addition, option traders took advantage of the weakening fundamentals and increasing risk aversion by purchasing puts. As conditions turned a little more optimistic in Europe due to the finalizing of the rescue package, bearish traders were forced to cover their positions. This is where we currently stand ahead of today’s opening.
The key to today’s market action will be whether investors put more weight on the economic reports or continue to react to conditions in Europe. In addition to these two factors, oversold conditions in the energy sector have been triggering a buying spree. If oil prices can’t follow-through to the upside today then look for profit-taking in these stocks because of the strong run-up this week. This too will also help limit gains.
U.S. equity markets rallied sharply higher on Thursday as tensions eased in the Euro Zone prompting investors to turn up demand for higher risk assets. The strong surge in the June E-mini S&P 500 negated Wednesday’s hard sell-off, triggering a rally through the minor retracement zone at 1074.50 to 1082.25. The market must now try to build support in this area if it wants to build enough upside momentum to drive it through the last main top at 1107.75 and turn the main trend to up.
The June E-mini NASDAQ daily chart suggests this market is lagging a little behind the S&P but nonetheless closed in a position to break out over a downtrending Gann angle and 50% price level at 1829.25. This move should trigger a strong acceleration to the upside.
September Treasury Bonds sold off sharply on Thursday as traders shifted money from the safer T-Bonds to the more risky stock market. Minor support at a 50% price level at 123’22 was broken early this morning, triggering an acceleration to the downside. A new main top has been formed at 125’00 indicating the formation of a secondary lower top. A trade through 121’06 will turn the main trend to down and should trigger a further decline to the major 50% level at 119’22.
T-Bond traders will take their cues from the equity markets today. A stock market rally is likely to keep upside pressure on interest rates as traders will demand higher yields in order to compete with the return in the equity markets.
On Thursday, European Central Bank President Jean Claude Trichet fueled a surge in the Euro by stating that the ECB would maintain its liquidity measures but not increase or add any. Investors liked this news because it indicted that the central bank felt confident in the economy. The Euro rallied on the news after the table was set for a strong short-covering rally.
The inability to break the Euro overnight after a hard sell-off late in the session on Wednesday triggered the start of a short-squeeze on Thursday. Short-traders scrambled to cover positions as downside momentum dried up after the European Union got its act together earlier this week and announced final plans to rescue its troubled members.
Technically the June Euro is still in a downtrend, but a new main bottom has been formed, creating a range between 1.2453 to 1.1876. This has created a retracement zone at 1.2164 to 1.2233. Based on the current upside momentum, this zone is today’s target.
In addition, two main bottoms at 1.2143 and 1.2153 are also targets, forming a huge resistance cluster at 1.2143 to 1.2164. With the main trend down, don’t be surprised if fresh shorts get reapplied in this cluster area. Some bearish traders still believe the sovereign debt situation will get worse before it gets better and the Euro will eventually trade down to parity with the Dollar.
The easing of tensions in Europe and the rally in the equity markets put pressure on August Gold on Thursday as traders lifted hedge positions. Gold completed a better than $50 two day rally this week, culminating with a new high for the year at $1254.50. This rally was triggered by risk concerns in the Euro Zone and the possibility of a collapse in the Euro currency. As concerns about risk abated, speculators began lifting hedges and taking profits after the huge run-up in prices. Bullish traders may try to build another higher bottom inside a retracement zone at $1226.30 to $1219.60. A failure to hold this area will be a sign of further weakness.
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