Yesterday’s late sell-off in the U.S. equity markets demonstrates just how fragile the stock indices are at current levels.  After trading higher for most of the day because of improved earnings from Wells Fargo Bank and Morgan Stanley, U.S. stock index futures sold off sharply into the close after Wal-Mart warned of massive price cuts for the holiday season and a confession that the going may be “rough.”  Coupled with this revelation was a downgrade of Wells Fargo from hold to sell by widely followed bank analyst Dave Bove.

The subsequent break in the market came after the release of the Fed Beige book showed the U.S. economy was recovering slowly although problems still existed with banking and commercial real estate.  

Today traders will once again be subject to another slew of earnings reports.  Since traders have been accustomed to buying dips, don’t be surprised by an early rally to at least 50% of yesterday’s break.  It is at this area that traders will have to decide to take the market higher or start another leg down.  

Today’s Leading Indicators report could set the tone for the day in addition to the earnings reports.  The consensus is looking for this indicator to rise.  Since this report looks forward 3 to 6 months, a strong report will signal economic expansion into early 2010.  Unemployment claims will also be released today.  This report is expected to show more job claims were placed.  

Better earnings before the opening could send equity markets higher from the opening, but any slow down in upside momentum could encourage selling pressure after the initial surge.  Taking out 1072.00 in the December E-mini S&P 500 will confirm yesterday’s closing price reversal top.  This would then indicate the potential for a break all the way back to 1056.75 to 1047.00.

Treasury futures are trading steady to better.  If demand wanes for higher risk assets, look for December Treasury Bonds and December Treasury Notes to rally.  The first upside objective in the T-Bonds is 121’07 to 121’26.  These markets have been treading water lately as economic reports and comments from the Fed indicate that interest rates should remain low, however, increased demand for higher yielding assets has helped drive up yields in the T-Bonds and T-Notes.  A sharp break in equities today should trigger a strong rally in the Treasuries today.

The U.S. Dollar is trading stronger this morning.  Yesterday’s sell-off in the equities has made traders a little more risk averse overnight.  News that China’s GDP was below analyst estimates is helping to boost demand for lower yielding assets.  The December Euro fell back below $1.50 last night.  Euro traders are a little hesitant to aggressively buy at current levels because of the threat of a “verbal intervention” by the European Central Bank.  Weaker crude oil and equities is helping to pressure the December Canadian Dollar.  The December British Pound, which has been one of the strongest currencies lately, is also giving back gains.  Currently this market is in a position to post a daily reversal top which could lead to the start of short-term correction.

The stronger Dollar is putting selling pressure on December Gold.  A rally earlier in the week to just under the top at $1072.00 attracted fresh selling while the Dollar was hitting a new low for the year.  This divergence is an indication of weakness.  A trade through $1043.70 will turn the main trend down and should trigger an acceleration to $1028.80.

Yesterday’s rally in December Crude Oil to just under $82.00 looks like short-covering. This market is being driven higher by speculation, higher equities and a weaker Dollar.  A stronger Dollar and lower stock indices today should encourage speculators to take profits.  The chart is vulnerable to a break back to 73.77.



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