Futures Point To A Technical Bounce
INTEREST RATES
While the Treasury market bounced aggressively
off the recent lows, the market wasn’t nearly as short as we expected it to be
in the COT report. The combined small spec and fund position showed a net short
of only 27,000 contracts and that is not an overly short position, that is
positioned to countervail the down trend. Given the economic numbers last week,
we can understand the markets need to short cover slightly but in the end, the
numbers were still indicative of continued economic recovery, they just didn’t
live up to the lofty expectations put in place by the bear camp.
STOCK INDICES
The stock market continues to dwell on the
potential negatives despite the fact that there are plenty of positives present
in the headlines. However, overnight US stocks traded in Europe were supposedly
down off ideas that US interest rates were set to go higher in the 3rd quarter,
instead of the 4th. In our opinion, the stock market has now suggested that
interest rates are set to go higher in the second, third and fourth quarters.
DOW
The June Dow appears to have recoiled away from the lows posted Friday and might
be indicating that those lows are a value zone. Since we are already seeing
signs that the market is preparing to absorb higher interest rates, a little
more hawkish tone from the Fed on Tuesday, shouldn’t completely unnerve the
market. However, we can’t rule out a re-test of the critical support in the June
Dow down at 10,200. In order to turn the trend up, we need to see a knifing down
to 10,140 and a sharp recovery, or a close above 10,320.
S&P
Just like the Dow, the June S&P managed to respect critical support at 1104 and
has managed a bounce. With the small spec and fund combined position coming into
the session today at roughly 10,000 contracts, the market would appear to be
close to a technical bottom. However, the market still needs to clean up its
fundamental picture by showing it can actually discount the eventual hike in
interest rates. Aggressive traders might buy a break inspired by the FOMC
meeting on Tuesday. Our pick for a solid low is still 1101 basis the June
contract.
FOREIGN EXCHANGE
US DOLLAR
The Dollar looks to be poised to violate support and
track slightly lower. Apparently the trade isn’t convinced that the US economy
is strong enough to weather a rate hike and that same sentiment is being
registered in the US equity market. In general, US economic readings have been
slightly disappointing, as they have come out below expectations. While the US
stock market can probably be confused off the coming monthly payroll report, the
Dollar won’t be confused. In other words, the Dollar needs and has to have a
strong number Friday morning. In fact, in order for the Dollar to hold the gains
posted since April 2nd the payrolls will have to leave the impressive that the
Fed is poised to act, sooner rather than later. In short, the market really has
given the Dollar bulls a tall order that the US economy must be so strong that
it an encounter higher interest rates and continue to expand. Critical support
in the June Dollar Index comes in at 90.54 and a trend line is violated with a
trade below 90.50.
EURO
Short covering action in the Euro over the last two
weeks has been driven mostly by US numbers coming in below expectations. In
fact, we haven’t really seen any number from the Euro zone that directly prompts
buyers to enter the market. However, we have seen US numbers that create some
doubt that US interest rates are going to shoot higher. In short, this is an
extremely critical week for the Euro. Not only has the Euro defied gravity with
the late April rise but also it has accomplished those gains without creating
the idea that moving money into the Euro zone is a good idea. In order to turn
the trend up in the Euro, the June contract would have to post two closes above
102.21.
YEN
A holiday trade takes some of the directional
information out of the Yen action overnight. The trend would seem to be pointing
down in the Yen and a rally back to 91.10 should be considered a sell. We see
the June Yen testing levels below 90.00 before the close Friday.
^next^
SWISS
Nice basing action in the Swiss leaves the market in
a position to discourage light selling. In order to turn the trend in the Swiss
back up the June contract, would have to manage a rise back above 77.85 today
and 77.77 on Tuesday.
BRITISH POUND
It would seem like the June Pound is unable to
regain the 177.50 level and is eventually going to return to the April lows. The
downtrend that began in February is not going to be easily altered, especially
if the US economy manages to sustain positive growth trends.
CANADIAN DOLLAR
The chart really looks negative in the Canadian and
with the Aussie and the Canadian still under suspicion because of fears that
Chinese demand for commodities is set to contract, there is little to shake the
Canadian from the down trend mentality. Look to buy a June Canadian 7300 put for
87 today on a slight bounce.
METALS
OVERNIGHT
London A.M. Gold Fix N/A LME COPPER
STOCKS N/A COMEX Gold stocks 4.142 ml -318 oz Comex Silver stocks 122.6 ml
+524,587 oz
GOLD
The gold market comes into the week under a
liquidation tilt. While some Dollar weakness last week seemed to alleviate some
selling pressure the gold market is still without a major supportive bull theme.
Economic uncertainty continues to decline, the market doesn’t seem to be
prepared to adopt an inflation tilt and the market seems to be getting less and
less support as a flight to quality commodity.
SILVER
While the COT report, which was measured before the
mid-week sell off took place, showed that funds were liquidating their net long
position, small traders were adding to their net long positions which rose to
the highest level since April, 1995. We think this setup makes the market
vulnerable to further liquidation and not as oversold as technical indicators
may suggest. The market will need support from a weaker Dollar to attempt a move
at resistance at 6.20.
PLATINUM
The COT report showed the funds and small traders
liquidating positions and by now the combined spec position has likely shifted
to a net short. As a result, July platinum could see more short covering this
session as the sell off from the highs seems to have been too far too fast.
Resistance for July Platinum is at $800 then $810.
COPPER
The copper market comes into the week under a
liquidation watch. News that South Korea’s LME approved warehouse received 2,000
tons of copper late last week, the first supplies in 5 months, is a negative
development especially since the copper coming from Chilea had been originally
destined for China, with more shipments from China coming. Shanghai copper
stocks declined by 18,000 tons last week, but at least some of this decline is
due to the transfer of stocks to other warehouses rather than physical demand
for the metal.
CRUDE COMPLEX
With last week’s crude and gasoline stock
declines and the weekend attacks on the Exxon/Mobile Refinery in Saudi Arabia we
have to think that the bias in prices remains up. Certainly the market is once
again progressing toward an overbought standing and many might suggest that
unleaded prices are already pricing in a serious problem this summer. However,
if there is an ongoing threat against the world’s largest producer (Saudi
Arabia), then historically high prices are justified.
NATURAL GAS
While some might suggest that the recent
consolidation in natural gas prices represents a top, we are doubtful because of
the persistent long interest present in the market since mid April. With the
funds net short 5,400 contracts as of the last COT report, we suspect that some
of the recent gains were short covering. But with the small spec long coming
into the week closer to 42,000 net long and the year over year inventory levels
holding at a 401 bcf surplus, the market is a little vulnerable.