Overnight stock indices enjoyed a brief rally following stronger than expected German GDP and a report showing a rise in New Zealand retail sales, but the markets could not hold on to their gains as investor focus shifted back to the U.S. economic reports due out later this morning.
Earlier in the session it looked as if trader sentiment was shifting back toward risk as equities traded higher while the Dollar weakened. Demand for higher risk assets made it look as if the tone of the day was turning bullish for commodities and stocks. This outlook shifted, however, when the Euro turned negative, taking equity prices with it.
It now appears that the optimism created early in the session is gone and investors are reverting to the pessimism about the global economy that has influenced the trading action since Tuesday when the Fed took action to loosen its monetary policy.
Using the September S&P 500 as our bogie, traders should look for a steady to weaker opening based on the current conditions. The charts indicate that this market still has the time and the room to complete a 50% retracement of the rally from 1002.75 to 1127.75 at 1065.25. Additional support may come in at an uptrending Gann angle from the 1002.75 bottom at 1058.75. If both of these levels fail to hold, then look for a test of the Fib retracement level at 1050.50.
At this time I don’t have a grasp on the expected volatility for today so traders will have to monitor this when the market approaches each of the aforementioned levels. In addition to the volatility, traders should also watch the order flow to see if a buyer emerges.
September Treasury Bonds extended their overnight gains when the Euro and equities weakened. Earlier this week the Fed set in motion the current up leg when it announced it would maintain its balance sheet buy shifting resources from mortgages to Treasury Bonds. Additional support for this market could also come from flight-to-safety buying if equities weaken substantially during the day session.
December Gold is trading higher although it appears investors are on the sidelines at this time waiting for the other markets to settle on a theme for the day. Yesterday this market broke a pair of downtrending angles, triggering a surge to a key 50% level at $1215.00. The close over this level suggests a bullish tone is developing which could send this market to the next upside target at $1228.00.
The key to the gold market today will be the direction of the stock market. Since equity and gold traders are competing for the same investment dollar, a break in the stock market could send gold soaring. On the other hand, if stocks find support in the identified areas, gold could begin a profit-taking break.
The September Euro is up this morning following a four-day setback which saw the currency drop from its highest level since late April. After reaching a low at 1.2780 on Thursday, the Euro has recovered slightly from this level and is now resting on an uptrending Gann angle at 1.2856.
This angle is a key balancing point and must hold in order to trigger the start of a short-covering rally back to 1.3057. A failure to hold this potential support angle could trigger further weakness which will eventually lead to a decline to a major 50% level at 1.2605.
Overnight the Euro received some support following the release of a report which showed the German economy grew at the fastest pace in two decades. This news helped underpin the market, leading to speculation that Europe is on a path to recovery.
Germany’s gross domestic product rose 2.2 percent in the second quarter from the first quarter. This growth rate was higher than analyst estimates of 1.3 percent and represented the fastest pace since 1991. The news helped trigger some light buying and short-covering, but gains may have been limited because this news is backward looking. At this time, traders are concerned about future economic growth.
The September Japanese Yen is gaining back some of its losses from the last two days, but is still in a position to post a weekly closing price reversal top. Last week the Japanese Yen closed at 1.1695, but after reaching a 15-year high this week, broke, putting it in a position today to finish lower for the week. A closing price reversal top once confirmed by follow-through selling often leads to the start of a 2 to 3 week correction which culminates at a major 50% price level. In this case, the potential downside target is 1.1176. A failure to close lower this week sets up the Dollar/Yen for further upside action next week.
The current two-day break in the September Japanese Yen has most likely been a reaction to the “verbal intervention” by the Japanese government earlier this week. Some traders feel the government will intervene at this time, but doubts still linger about its effectiveness.
According to the Bank of Japan minutes from the July 14-15 meeting published overnight, the BoJ is closely monitoring the effect of a strong Yen and falling stock prices on the economy. If one interprets this to mean that the BoJ is seriously considering an intervention at this time, then this news will act as the catalyst to drive the Yen sharply lower.
Today traders will get a chance to react to a series of U.S. economic reports. The key reports which should dictate the tone for the day are the CPI and Retail Sales. The CPI report is expected to show an increase of 0.1%. A negative number is likely to pressure stocks and send T-Bonds higher. Retail Sales are called 0.5% better. Like the CPI, a lower number will be bearish for stocks.
Later in the morning, the Michigan Sentiment report is expected to show a small decline. This report is expected to reflect the growing pessimism in the economy over jobs and housing. Business Inventories may show a slight rise.
Traders should watch the Euro and the asset-linked currencies for clues as to the stock market’s direction. Look for equities to rally if the Euro turns higher and the Australian and New Zealand Dollars turn positive. 
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