The June E-mini S&P 500 followed through to the upside Tuesday night confirming the daily closing price reversal bottom formed earlier in the day. Based on the current short-term formation, traders should watch for a 2 to 3 day retracement with 1105.75 to 1122.00 the next possible upside target.
A similar pattern is developing in the June E-mini NASDAQ. Now that the reversal bottom has been confirmed, traders should watch for a 2 to 3 day rally to perhaps 1868.00 to 1895.
How high this short covering rally takes the major stock market averages and indices is up to the hedge funds and large traders who have taken control of the stock market. Although oversold conditions have made the markets ripe for wicked retracement rallies, there does not seem to be a change in trend to up in the works. Like any developing bear market, the major players will treat any significant rally as a new shorting opportunity.
The main concern for investors continues to be the fear that the sovereign debt issues in the Euro Zone are out of control and threatening the global economic recovery. Evidence is mounting in the corporate debt world that credit is tightening in a move very similar to the events which unfolded prior to the seizing up of the credit markets in 2008. At times it feels like the major financial institutions are being threatened by conditions very similar to what was happening during the Lehman crisis of 2008.
In addition to the worsening credit conditions, including rising Libor rates, tensions between North and South Korea are making investors uneasy, leading to the current rotation out of risky assets.
Watch today for more short-covering, but be aware that major hedge funds and institutions are lurking out there to apply fresh short positions.
The strong recovery rally in the stock indices helped push June Treasury Bonds down into the close, but the market was able to hold on to its gains. Overnight the T-Bonds have eased due to the strength in the equity markets. A follow-through to the upside in the equity markets is likely to trigger a break back to 123’00 over the near-term. Losses may be limited if there is great demand for Treasuries during the auction.
June Gold is trading overnight in reaction to the weaker Dollar. The rally in gold is being triggered by both fundamental and technical news. Fundamentally, gold is up because of uncertainty and risk in the Euro Zone. Traders are buying gold as a hedge against the possible collapse in the Euro.
Technically, the main trend is up which means investors will continue to buy dips. The recent range of $1249.70 to $1166.00 has set up a possible retracement to $1207.80 to $1217.70. This zone is currently being tested in pre-opening activity.
September Crude Oil is recovering this morning after regaining a key 50% price level at 72.16. The stronger Euro is helping to produce this morning’s relief rally. The charts indicate that 75.18 is the next potential upside target before new selling pressure arrives. The current developing rally is merely short-covering and bottom picking. Fundamentally, a slow down in demand should show up in today’s crude oil inventory report.
The June Euro recovered overnight after a firm close. On Tuesday, this market successfully tested the low for the year at 1.2143, triggering a short-covering rally. If this low holds, then it will mean that last week’s reversal bottom is still intact while indicating that buyers have stepped in to support the currency.
The best sign that a bottom is being formed and that Tuesday’s action was a successful test of the low will be the regaining of the Fibonacci retracement level at 1.2345. Holding this level could trigger a further rally to the 50% price at 1.2407. Building a fresh support base in this price zone will be a sign of higher markets to follow, but the main trend will not change to up until 1.2671 is taken out.
A break though 1.2143 will indicate that further downside movement is likely with the early 2006 price at 1.1825 the next likely downside target.
The main catalyst behind the weakness in the Euro is concern that Europe’s sovereign debt issues are spreading, threatening the global economic recovery.
Traders have been selling the Euro since early Sunday evening when Spain took over a struggling financial institution. The move accelerated to the downside after the International Monetary Fund said Spain has been too slow to strengthen its banking system. This statement by the IMF helped create uncertainty in the market leading to the current sell-off.
Technically, the Euro is oversold, but it is going to take an easing of concerns in the Euro region before any of these oversold indicators will have any relevance.
Tuesday’s action was the first sign that actual buyers may have entered the market. This usually happens after the type of reversal we saw last week. Following a prolonged move down in terms of price and time, the first leg up is usually short-covering. The first leg up is 1.2143 to 1.2671. Following a test of a retracement zone or the actual bottom, the next leg up is usually new buyers.
At this time, oversold conditions are battling the bearish fundamentals. In other words, traders know the fundamentals are bearish, but can’t seem to muster up the courage to short this market again and again at such extremely low levels. Since the Euro is in a long-term decline, traders must get used to the possibility of whip-saw conditions at times while facing huge retracements.
Watch for the Euro to try to build a base between 1.2407 to 1.2345 then make a run at 1.2671. A breakout over this level is likely to trigger a massive short-covering rally to about 1.2917. 
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