by James Hyerczyk
U.S. equities are called higher this morning after posting a strong gain on Wednesday and a follow-thorough rally last night. The stable Euro is contributing to the rally along with position squaring ahead of Friday's U.S. Employment Report. In addition, traders seem to be getting a little more optimistic that the global economic recovery is getting back on track based on fairly decent U.S. economic numbers.
On Wednesday, a better than expected U.S. home sales report helped drive stock prices higher. Traders took advantage of the thin trading conditions to drive the three major indices higher after failing to follow-through to the downside following Tuesday's sharp sell-off.
The June E-mini found support earlier in the week following a test of a minor 50% retracement level at 1071.75 and is now in a position to test a major 50% price level at 1105.75 and last week's high at 1106.75.
Watch for an acceleration to the upside following a breakout through 1106.75, triggering a change in trend to up. This will mark the first change in trend to up since May 4th. More buyers could pile in the market which could eventually send the E-mini S&P 500 into the next retracement level at 1122.00.
September Treasury Bonds are trading lower, pressured by Wednesday's good U.S. housing number and the liquidation of safer assets. Once again the T-Bonds failed to take advantage of the room on the upside and instead have settled into a range. Look for this market to remain sensitive to the direction of the stock market. The break through the series of lows at 122'05 is a sign of lower markets to follow. A strong rally in the equity markets could send the T-Bonds to 119'22.
Both September Crude Oil and August Gold are holding steady this morning but seem ready to react to the strong rally in equities. Gold seems poised to drop sharply should demand pick up for equities. A failure to hold $1219.50 will be the first sign of weakness. A trade through $1209.70 will likely accelerate the move to the downside.
Greater demand for riskier assets should help crude oil rally. Traders seem to be waiting for today's oil inventory report before making their move however. The charts indicate that there is room to the upside with 80.88 the next likely target.
The June Japanese Yen is breaking sharply lower, weakened by greater demand for risky assets and on speculation that the next prime minister will favor a weaker currency.
The Japanese Yen began to weaken Wednesday following the resignation of Japanese Prime Minister Yukio Hatoyama. Traders are worried that the economy will weaken further during the election process at a time when China's economy is slowing and Europe continues to struggle. In addition, speculators are selling the currency because they believe the next prime minister will be Naoto Kan who favors a weaker currency.
Look for downside pressure to continue on the June Japanese Yen as long as it remains under the .618 retracement level at 1.0854.