Futures Point To A Flat Open
1/4/2005
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INTEREST RATES
The Treasury market managed a rather impressive
two sided trade to start the year yesterday and by the flow of economic
information it is clear that the bull and bear camps are evenly matched to start
the year. It was also clear that the economic information offered both the bull
and bear camps something, as construction spending figures and the ISM
employment Index declined, while the main ISM reading actually posted a
surprising gain. It is also clear that the fund and small spec positioning is
polarized with the fund long reaching 61,665 contracts as of December 28th, and
the small spec short reaching 22,788 contracts.
STOCK INDICES
The stock market apparently overextended in the
early action yesterday and that action could extract a penalty from the bull
camp in the coming sessions. For the entire market to slide lower off the
weakness in the energy sector suggests that sentiment is negative, as the market
could have easily have been cheered on by the sharp declines in energy prices
yesterday, as that type of action is extremely beneficial for the economy as a
whole. We doubt that equity prices are due for anything more extensive than the
typical 2-3 day corrective setback, as pension fund money is supposedly flowing
to fund managers and the market is probably set to benefit from bargain hunting
buying.
DOW
The chart in the Dow continues to be a little uglier than other sectors, with
the Dow forging 4 days of lower highs and lower lows. Also undermining the Dow
is the realization that the fund long did manage to post yet another record in
the most recent COT report. Therefore, the market was overbought and needed a
technical correction. On the other hand, fundamentals seem to remain bullish and
traders should be interested in buying breaks in the March Dow.
S&P
As suggested before, the March S&P would seem to be poised to extend the
reversal action from Monday. In fact, we would not be surprised to see the March
S&P forge a 2-3 day down pattern. However, all things considered, traders should
be ready to buy breaks in this market as the trend is up.
FOREIGN EXCHANGE
US DOLLAR
The Dollar has forged an impressive extension of the
short covering bounce. While we would like to suggest that the rally is coming
compliments of a sudden realization that the US economy is strong, that is only
partly true. Certainly the US economy is set to outperform other economies and
certainly the US is set to see interest rates rise faster in early 2005 than in
other areas, but we are not entirely convinced that the current action has
anything to do with the fundamentals. In fact, considering the conclusive
bearish sentiment toward the Dollar, international skepticism toward the US
deficit situation and the pattern of disjointed US numbers, we have to think
that the current rally is almost exclusively a technical short covering wave.
Nonetheless traders should continue to hold previously suggested long March
Dollar Index 83 calls with an objective of 120 just in case the Dollar manages a
long due fundamental shift. In the near term, we suspect that more Dollar gains
are in store, as the magnitude of the downside action in 2004 could by itself
justify a significant short covering bounce. However, in order to affect a
fundamental bottom, the US Dollar might only need an above expectation gain in
the coming payroll report.
EURO
There is no denying that the Euro has managed some
significant chart damage and when one considers the magnitude of the Euro rally
since mid December it is not surprising that the bottom has fallen out. Unlike
the Dollar (where the economic outlook has been improving, but remains
conflicted) the European economy has shown patently concerning information of
late. In addition to the disappointing French employment readings last week, the
Euro is also confronted with a very weak German employment reading this morning.
In fact, the German unemployment rate increased to 10.8% from 10.3% and that
would seem to facilitate the current decline in the Euro. Near term downside
targeting in the March Euro is seen at 133.54 and then again down at 133.07.
YEN
While the Japanese stock market managed some gains
overnight, it would seem like the Yen is under only minor pressure to start the
session out. Therefore, we are not inclined to pick on the Yen from the short
side, because of its recent strength. In fact, we doubt that the Yen is going to
see a slide below 96.42 on the current pulse down.
SWISS
The Swiss is extremely vulnerable and is apparently
headed down to consolidation support of 86.00 in quick fashion. In the event
that the Swiss falls down to the consolidation lows of 86.00 that could give the
impression of a massive broadening top formation.
BRITISH POUND
The Pound has also violated a series of critical
support levels on the charts and might be in the same position as the Euro zone,
with very troubling internal economic conditions contributing to the selling.
Near term downside targeting in the Pound comes in at 187.50.
CANADIAN DOLLAR
The Canadian Dollar seems to be headed back down to
the 82.00 pivot point but considering the recent strength, we would avoid
chasing this market with sell orders. In fact, without some specific economic
reason to sell the Canadian, we would simply pass on the current short term sell
signal.
METALS
OVERNIGHT
London Gold Fix $435.15 -$8.35 LME COPPER
STOCKS 48,875 metric tons Unchanged COMEX Gold stocks 5.795 ml -418 oz COMEX
SILVER stocks 103.5 ml +9,680 oz
GOLD
While it would not seem like the gold market is
totally unnerved, there could be that potential today, as the Dollar is showing
another round of significant short covering gains. In fact, the Dollar managed
to reach the highest level since December 22nd in the overnight trade and that
is significant when one considers where the Dollar bottomed out last week. Since
the COT report showed gold to have a net spec and fund long of 182,000 contracts
as of December 28th, we doubt that the spec long has been fully washed out of
position yet.
SILVER
Like gold, silver is certainly vulnerable to long
liquidation as the most recent COT report showed silver to have a net spec long
of 65,000 contracts. Given the action in the Dollar and gold early today, we
would not be surprised to see March silver slide down toward the September
consolidation lows around $6.14. However, if the Dollar were to stumble, and
gold could shut off the selling early, it is possible that March silver would
manage to hold up at initial closer-in support of $6.35.
PLATINUM
After a surprisingly strong December rally, the
platinum market once again seems vulnerable to quick and aggressive selling. In
fact, a close below the critical pivot point of $840 could quickly project a
slide down to $830.
COPPER
The copper market seems to be undermined by the
severe liquidation in the precious metals and the overnight decline in the
Chinese copper market certainly doesn’t help the bull case. With reports of
producer selling coming on top of an extremely overbought condition, and
moderate profit taking unfolding in the US equity market, it would seem like the
copper market is primed for a corrective move. The most recent COT report showed
the small spec and fund long position to be 35,000 contracts and that was
certainly understated, with the March copper topping out 275 points above the
COT report mark off level yesterday! Furthermore, considering that copper prices
rallied 17 cents in the month of December alone, it is not surprising that some
type of significant backlash is seen.
CRUDE COMPLEX
The energy complex at times on Monday was down
aggressively but in the end the market had second thoughts about the massive
slide in prices. In the crude oil market, the trade managed to bounce $.74 into
the close. As we suggested in the written commentary Monday morning, we suspect
that even more downside is ahead, but that the December lows could offer up
significant chart support.
NATURAL GAS
The natural gas market forged another aggressive gap
lower trade and seemingly has left the summer consolidation pattern well behind.
Unfortunately the natural gas market continues to register a massive small spec
long of 34,000 contracts and that could mean even more long liquidation is
ahead. The next critical support level in March natural gas comes in down at
$5.80 and with the weather mild and the regular energy complex remaining under
pressure, we are not sure if the market is capable of shifting the trend away
from the downside, without some fresh and significant supply development.