Thin Markets to Determine Market Volatility; S & P Trading at Daily Resistance Levels

By 06 Dec 2010 0 comments

Fundamentals:

We are currently seeing thin market activity and given the proximity to the major U.S. holidays, we could see one of two situations play out.  Most likely we will see volatility either at one of two extremes.  Fewer trading participants allows for greater price fluctuations, so if any large orders are placed, we could see major stop loss activity.  It is important to keep this in mind in the coming weeks.

Sentiment is still experiencing a hangover from last Friday’s non-farm payrolls report.  The report damaged risk assets and currencies in particular saw high levels of volatility.  EUR/USD traded to a high of 1.3445 and the AUD/USD had another attempt at reaching parity.  But both of these highs gave way after the employment releases.  Overnight, during the Asian session prices dropped further clearing out weak stops from positions initiated after the data.

Equities, on the other hand, have managed to show some level of stability with the S & P still trading near the highs.  At this stage, it remains to be seen which asset class is actually leading the way here.  Will equities follow the risk currencies lower or will it be the other way around?  Given the confusion here and the unpredictability of the holiday season, many traders are standing aside until we have some strong data releases to give the markets some direction.

The US Dollar is one market that deserves special attention, as we have seen volatility in the Dollar Index move to suggest that its consolidation period has run its course.  IMM positioning data shows that the market is still net short, so we could have some Dollar buying ahead of us in the near term.

There is no important macro data today, so technical positioning will be the major reasoning behind new positions.

Technicals:

Commodities:

As expected, gold is closing in again on its old highs near 1420.  This was not surprising after seeing all the key Fibonacci resistance levels break but getting long at this elevated stage is unwise.  Indicators on the 4H charts are bullish but we are rolling over from overbought territory just ahead of the all time highs.  This is a red flag and signals that at least some period of consolidation or downward correction is in store in the near term.  Key support is at 1380.

Currencies:

The recent EUR/USD has started to show some weakness at a confluence of resistance levels just short of 1.3450.  Here rests an old low (support turned resistance), the 100 period hourly EMA, an hourly downtrend line and the 38% retracement of the drop from 1.43.  If these areas are broken later, we start to target the 62% retracement level at 1.3770.  But until that happens, the short term bias is still lower, with the first support coming in at 1.32, followed by 1.3040.

Stocks:

The S & P 500 is continuing its impressive rally and we have even seen the index make new highs above 1225.  The current price level is significant on the daily charts, and we are seeing a triple top formation that has technically broken.  We would like to see a clearer break of this level before we get too excited, given that the RSI on the daily charts is above 60.  A clear break above 1225 puts 1300 back in focus over the medium term.

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