Fundamentals:

The equity markets in the U.S. will probably open flat following the lackluster European session.  Generally, European stocks saw declines across the board as traders squared positions and made bond purchases as a hedge against the potential volatility that could be created by today’s economic data.  The reports today will give the market more indicators to confirm whether or not the U.S. economic recovery is still moving forward.

Sentiment in the U.S. is likely to give a mixed picture for stocks today as we have very thin New Year’s Day volume and market stories in general taking a breather.  We do have some positive information with the initial jobless claims numbers that fell below 400,000 for the first time since July 2008.

Given these factors, the U.S. session will not have enough information or built-up sentiment to give traders a clear direction.  Some sectors are likely to be more volatile than others but without any major run of stop loss activity, we will see a quiet day of trading to end 2010.

Fundamentals:

We are coming into the end of the year and the seasonally influenced trading conditions will be affected by reports today, which will give details on the status of U.S. employment and housing markets. Pending sales of existing homes and weekly jobless claims are both expected to show slight improvements from the previous month.

Most in the market agree that the worst of the real estate catastrophe has passed (too much supply and not enough demand) but good numbers today will show markets that the real estate recovery has not finished.  There is still a lot of real estate inventory that needs to be sold, so today’s Pending Home Sales is unlikely to show and drastic differences.  Pending sales are typically a leading indicator of existing home sales because the same data is collected but this is done at a different stage of the selling process.  Additionally, we saw PMI manufacturing data from China and Japan and both of these releases were disappointing.

China’s manufacturing sector did show expansion, but this trend is slowing, as we saw from the HSBC PMI survey.  The PMI dropped to 54.4 from 55.3 as the government tries to slow growth and keep inflationary pressures at a manageable level.  The consumer price index rose 5.1% yearly, mostly a result of increases in food prices.

In Japan, we can see that the manufacturing sector is still contracting.  Manufacturing PMI came in at 48.3 for December from 47.3 previously.  The rate of contraction is slowing but it is still a contraction.  It appears as though Japan will be printing zero or even a negative fourth quarter GDP growth rate, given the lack of positive surprises. Industrial production has dropped 2.8% in the fourth quarter, coming after a 1.8% decline during the third quarter.

Technicals:

Commodities:

Gold is continuing its march forward in impressive fashion, always managing to find buyers.  Resistance at 1407 has been overcome and we are not seeing anything in the way of a meaningful pullback.  There were apparently no large stops above this level but after at least a period of consolidation we expect a test and eventual break of the all time high at 1431.  We would have liked to have been long at this stage but the break of Fib support at 1368 put us on guard.  We will look to buy pullbacks into support around 1390 after the overbought indicators have a chance to unwind.

Currencies:

We entered into a short term buy in GBP/USD after prices found support at the old lows around 1.5320.  We closed the position this morning for a gain of about 110 pips and this looks like it was a good decision because prices have started dropping again.  We were hoping for some further gains above 1.56 so that we could get bearish but it looks like there might be no opportunity.  A break of the support level will probably cause losses to accelerate so at this point we are just waiting for rallies to start scaling into sell positions.  Resistance now has moved down to 1.5530.  If we do see a break there we will look to sell around 1.57.  Longer term indicators are bearish and turning downward, so we will probably see a break of support in the next few trading sessions.

Stocks:

Equities for the most part have not started selling off the same way currencies have but if we look at the DAX, we are finally starting to see some red candles, so this might be the leading indicator for equities as a whole.  Prices have starting to find resistance just below 7100, which is significant because of the proximity to longer term historical resistance at 7250.  The weekly indicator is rolling over from overbought territory and pointing down now, so this might be the drop we have been waiting for.  Longer term, historical support does not come in until 6400, so the moves here could be large.

Fundamentals:

Futures contracts in the U.S. equity markets are pointing to a flat open after the European session finished positive.  This was slightly surprising, given the downward revision to French GDP for the third quarter.

U.S. stocks could follow this push higher on the positive sentiment generated by reports suggesting that we saw the best holiday sales figures in five years.  Sales rose 5.5 percent from the previous year.

The trend in global equities is still up despite China’s interest rates hike over Christmas and concerns over Europe’s sovereign debt crisis. But at the same time, it is difficult to start buying at such high prices.  The sentiment was aided by a report showing that American consumer confidence increased this month, which is supportive for stocks (retailers, in particular). Last week, we saw a report from Walgreens that beat expectations, so we can even pinpoint specific examples of rising confidence in the American consumer.

In currencies, we are currently seeing a remarkable rally in the Swiss Franc against the U.S. Dollar and Euro.  Currently, the Franc is trading at the highest levels in 20 years.  The Swiss Franc is typically thought of as a safe haven currency, so we can think of Korean political instability, debt crises and overall disappointing growth numbers as catalysts for this.  These factors point to a potentially strong performance for the Franc in 2011.

But we are seeing a disconnect here with equities, which are still pushing higher.    Only one of these scenarios can be correct, so traders that can correctly identify the error in price activity will find current levels as an attractive entry point.  Given the number of risk negative effects markets are currently watching, we are inclined to believe that it is equities that are overvalued.  Today, the U.S. session could focus on IT, retail and health care stocks, as tech valuations and flight to security (for health care and retailers) could attract the most trading volume.

Technicals:

Commodities:

Gold is currently running into the 1407 resistance level that we have been mentioning and there is very little pullback here, which suggests that this level is on the verge of breaking.  We are seeing higher highs on the 4H charts so as long at the uptrend line from 1330 holds, we expect a resumption of the larger uptrend.  This line coincides with strong support at 1392 so we are currently looking at this level as a buy entry.  Indicators on the 4H charts are bullish but we are currently in overbought territory, which is not surprising given this last impulsive wave.  Any pullbacks from here are likely to be met with strong buying activity.

Currencies:

The GBP/USD has entered into some interesting territory and is currently trading at what should be considered as very strong support at 1.5340.  Normally, this would be considered an excellent buy area but the lack of bounce out of this level is very discouraging.  We are expecting any rallies to be sold so we are currently watching 1.55 as the next entry point.  Something closer to 1.57 would obviously be better but this chart is starting to look very weak and we are not expecting to have that opportunity.  We will enter at 1.55 and scale in until around 1.57 if prices start to work against us.

Stocks:

Equities, on the whole are starting to look very boring, from a technical perspective.  Prices have broken significant resistance levels on both a historical and Fibonacci basis, so longer term, we are expecting more gains.  But in the shorter term, we cannot expect this type of rally to continue much longer, so probability favors sellers much more than buyers, at least for the next few weeks.  Key resistance levels:  6413 in the FTSE, 7255 in the DAX, and 1315 in the S & P 500.

Fundamentals:

The U.S. equity markets will probably have some trouble finding buyers today after the European session saw equities drop 1.5 percent.  The main story was that the People’s Bank of China (PBoC) raised interest rates by 25 basis points in an effort to slow economic activity in China to more sustainable levels.  But this has led many analysts to suggest that this will slow down the global economy as well, and stocks are not responding favorably to the news.  The question of how big of an effect this will have on the global economy is likely to be a recurring story for 2011.

Markets were starting to relax and assume that rates would not be raised so soon in China, so U.S. stocks will probably meet steady selling throughout the day.  Momentum selling is likely to pick up as traders start to take profit from the currently elevated levels.  What remains to be seen at this point is whether or not the markets have fully priced in this slowing in growth in the BRIC countries the impact this could have on global growth.

During the U.S. session today, attention will turn to the consumer discretionary and financials sectors, which have a direct connection to the ripple effects of the Chinese rate hike.

With the recent activity, the People’s Bank of China is showing markets that during 2011, their strategy will seek to move forward in a conservative fashion, rather than pushing for strong growth.  The limitations this will put on the Chinese economy will negatively influence global car sales and the accompanying financing, which is why banks, automobile manufacturers and auto components producers will be closely watched.  With this in mind, traders should pay particular attention to the major players in these sectors, which include Ford, GM, Goodyear, Citi Group and J.P. Morgan.

Technicals:

Commodities:

Gold has made a nice move to the upside after breaking the neckline of a reverse head and shoulders pattern on the 4H charts.  On the same chart, we have a nice uptrend line from the lows around 1330, so we expect to be testing resistance as long as that support holds.  Next resistance comes in at 1408, followed by the all time highs just above 1430.  Support has moved up to the old resistance level at 1390, which is followed by 1372.  Indicators are slightly bullish but we are coming very close to overbought territory.  Buy into support for the next run higher.

Currencies:

The EUR/USD has pushed through the top of its holiday-affected range, so this is a good indicator of how we will start next year.  Right now, we are pressuring the downtrend line from the highs near 1.43 and a clear break here is another argument for the bullish bias.  The key levels to watch are 1.3360 and 1.35 for resistance, and 1.3050 for support.  A violation of this last level takes the pressure off the upside, and targets support just below 1.30.  4H indicators are bullish but we are starting to approach overbought territory.

Stocks:

On the weekly chart, the latest push in the S & P 500 has cleared the way for a test of resistance at 1315.  That said, there likelihood of some sort of corrective pullback at this stage is becoming greater and greater and for a shorter term sell strategy, the current elevated level present an attractive selling price.  Support has now moved up to 1225, so a break here would be the first signal that the current rally is loosing steam.  Major support is at 1170 and a break there would turn the bias to bearish.  Indicators are still bullish but they are starting to roll over.

Fundamentals:

On the whole, the month of December did not register any major disappointments, even though the possibility for something like this was clear and present.  Potential market influences included the uncertain European debt situation, the possibility that the attention-starved North Koreans “will start” a major war, or that the Chinese will try to put a stop to whatever growth is actually happening in the world by raising interest rates.  This, coincidentally or not, was coupled with the Holiday Sales season in the U.S., which also could have made headlines with disappointing news.  But, alas, this was not the case.

Generally, December was positive, which will have the psychological effect of creating a strong start to 2011.  Equity markets have essentially taken the up-escalator, reaching new highs and showing very little in the way of retracement.  Right now, there is nothing to suggest that the trend will change today.

Volume could be affected because some European countries celebrate Christmas on a different date, so trading volumes could thin-out and allow for more drastic moves.  That said, markets seem calm and we don’t expect major changes.

Bias now is essentially bullish, with energy, basic materials and technology seeing few obstacles.  Keep stops tight and remember that literally anything can happen in this environment, even though it shouldn’t.  Happy trading and Merry Christmas.