By James Hyerczyk
Global stock markets took a break overnight after a huge run-up in the U.S. markets on Tuesday. Investors pared positions ahead of Wednesday's producer price, housing starts and industrial production reports.
On Tuesday, U.S. equity markets soared, fueled by the belief that the financial problems in the Euro Zone and the slow-down in the global economy may be diminishing. Investors want to see if today's reports indicate the U.S. is still on the path to recovery before committing additional funds to the rally.
The main trend in the September E-mini S&P 500 turned up on Tuesday on the move through the last main top at 1102.75. In addition, the market closed over a 50% level at 1101.25, indicating that the market is likely to continue to move higher toward a resistance cluster at 1117.50 to 1122.00.
The overnight trade indicates that the S&P 500 is likely to open near the old tops at 1102.75. The five-day rally from the recent bottom at 1037.00 may also be running out of steam because of short-term overbought conditions.
Last night President Obama spoke to the nation about the BP oil leak in the Gulf of Mexico. Obama tried to tell the nation that there was a plan in place to provide financial compensation to those affected economically by the leak while using the opportunity to discuss the need for more renewable energy. Judging from the stock market's reaction, investors do not seem to like what they heard.
Demand for higher risk assets and the assumption the global economic recovery is back on track helped to drive up September Crude Oil on Tuesday. After forming a secondary higher bottom at 71.92 early last week, the main trend turned up when the market crossed the last swing top at 77.84. The chart is now indicating the market is on pace to test the 50% level at 80.90.
The September Euro is called weaker this morning as traders pare back positions after a strong run-up this week. Concerns about Spain are causing traders to take a cautious look at the upside potential for the Euro.
The single-currency continued to rally on Tuesday as short-traders covered positions on the assumption that the Euro Zone economy may be stabilizing and the risk of a collapse in the currency is abating.
Investor confidence in the global economic recovery continued to improve during Tuesday's trading session, leading to an increase in risk-based trading. The demand for greater risk encouraged traders to reverse so-called flight to safety positions in the U.S. Dollar.
Technical factors were also driving the Euro higher after the formation of a closing price reversal bottom last week. Now that this reversal has been confirmed by this week's follow-through rally, traders are becoming confident that the current upside momentum may be strong enough to take out the last main top at 1.2465. This action will turn the main trend up on the daily chart. The weekly chart indicates that this move may last 2 to 3 weeks with 1.2784 the minimum upside target.
Traders should not assume the market will rally without a correction. The charts indicate that the bottom at 1.1884 has not been tested, meaning that a 50% or more correction to set up a secondary higher bottom is still likely.
The September British Pound is also called lower this morning. Technically the currency is having trouble at a 50% level at 1.4810. Renewed concerns about sovereign debt issues in Spain are leading investors to pare risk based positions.
On Tuesday the Sterling was able to recover from an early morning set-back triggered by not-so-friendly U.K. inflation data. The easing of tensions in the Euro Zone and greater demand for risky assets was the catalyst behind Tuesday's turnabout.
The main trend turned up in the British Pound on Monday but the rally has been labored because of 50% retracement resistance at 1.4808. This market slowly probed this price level late Tuesday but was unable to trigger stops or attract fresh buyers. Nonetheless, this price level remains an important area to overcome. A sustained trade over 1.4808 tomorrow will set up the Sterling for an acceleration to the next key retracement level at 1.4945.
Investors will be watching today to see if market participants decide to shift away from risk concerns to refocus on the U.S. economic situation. Stronger U.S. economic reports may actually drive down the Dollar as traders may decide to focus on renewed demand for risky assets.
