The September British Pound surged to the upside overnight despite news that the U.K. economy shrank more than previously forecast. The U.K. Gross Domestic Product report showed that during the first quarter the economy suffered its biggest contraction since 1958. Weakness was seen across the board in the economy as everything from construction to services showed some sort of weakness.

The three-month long rise in the British Pound has defied most analysts who are in the same camp as Bank of England Governor Mervyn King who believes that the road to recovery will be long and hard. Even if the global economy is beginning to bottom, the U.K. economy still faces rising unemployment. This is a lagging indicator, but if unemployment continues to march higher then eventually consumer spending will suffer. If consumer spending falls along with confidence then the economic recovery may slow considerably.

Although the fundamentals do not support the 90-plus day rally, there are signs this morning that a top may have been reached. Earlier this month the September British Pound formed a pair of tops at 1.6660 and 1.6620. The subsequent break from the highest high dropped this market to 1.5790. The break was short in duration and never really attracted heavy selling pressure. The quick recovery from this bottom was a sign that this market was not ready to correct despite the build-up of negative fundamentals.

Following the release of the news regarding the U.K. Gross Domestic Product, traders drove the September British Pound through the two main tops to reaffirm the uptrend, but ran into selling pressure following the test of a major 50% retracement price at 1.6723. The actual high before the sell-off was 1.6742.

A lower close today following the higher-high will be a strong sign that the selling is greater than the buying at current levels. This pattern could set up the Pound for a substantial correction especially if the recent bottoms at 1.6185 and 1.5790 fail to hold.

Trading is mixed in the Treasury markets overnight. Bonds and Notes have been trading on both sides of the market. The recent surge in prices in both of these instruments in the face of increased supply was probably due to end-of-the-quarter position adjustments. This means the current rally may be short-lived.

Equity markets surged to the upside yesterday after early morning weakness then the market died. Volume and volatility were both light as traders lacked the conviction to take these markets higher. Fundamentally, investors are looking ahead to the U.S. Unemployment Report on July 2nd as well as the U.S. market holiday on July 3rd. Both of these events are keeping most traders on the sidelines. The beginning of earnings season next week is also curtailing demand for equities at this time.

Equity markets are going to finish the quarter with huge percentage gains. It is doubtful that these markets will be able to maintain the pace of these gains during this quarter without first going through a normal correction.

If you use the September E-mini S&P 500 as your indicator then you should be watching for a possible secondary lower top formation. The completion of this type of pattern will be a sign that this market is getting ready to rollover to the downside.

There are two scenarios developing for which traders should be watching. The first is the overnight market pattern. The Main Range is 953.00 to 884.25. This creates a retracement range at 918.75 to 926.75. The second is the day session pattern. The Main Range is 952.75 to 884.25. This range creates a retracement zone at 918.50 to 926.50.

Combining the two charts creates a key resistance price at 926.50 to 926.75. Watch how the market reacts at these prices. If this market cannot penetrate this resistance zone then look for the start of a decline. The first downside target will be 913.50. A close under this price will put the market lower for the month and form a monthly closing price reversal top which is often a very bearish signal.