Market Open – Friday July 27, 2012

ECB President Mario Draghi’s ‘I have got a bazooka and I may use it’ speech in London galvanized the markets around the world. S&P futures and European markets, which were trading water before the speech turned around on a dime and then never looked back. However, based upon immediate past performance, the overall move still does not look very convincing. Words have to be backed up by actions by the central banks and governments around the world.

Post Draghi’s ‘and, believe me it will be enough’ speech‘, North American markets closed up 1-2%. FTSE 100 was up by 1.5%, DAX by 2.8%, CAC-40 by 4% and Bovespa by 2.8%.

Since the last week of June, DJIA is making is making an ascending triangle with an upper limit of 12960-12980. Thursday’s move has brought it near this ceiling. A break above this will give it a good chance of testing May 1^st high of 13338.66.

On the other hand, the Dow Transport – a Dow Theory tandem partner of DJIA – is making a descending triangle since mid-June. The lower limit is bounded by 4940-4910. Dow Transport recently touched this floor on Wednesday and Thursday’s price action is just getting it off the floor. So it is mixed signal. So what will it be? Will DJIA take DJT higher or will DJT take DJIA lower?

In UK the FTSE 100 had a great day too. In early July, it made a short term double top (DT) and then on Monday, July 23, it broke the neck line and then moved down coming very close to reaching the measured target of a DT pattern. Yesterday’s move brought it up to the resistance of the broken neckline.

The German DAX is in the an upward sloping flag – which could turn out to be bearish if the index falls below the lower limit. However, at the moment, it is making a trip to the upper limit of the flag.

Overnight Action:

S&P futures generally maintained the gains acquired on Thursday. Asian session saw a high of 1362.25 – up by 7.25 from NY close. Early European session some profit taking bringing it down to ‘unchanged’ before another leg up to overnight high.

At around 7:00 AM EDT, S&P futures are up by 6.00, Dow by 42 and NASDAQ by 12.75.

Asia / Pacific:

The after effect of Thursday’s North American and European market action carried on to the Asia and Pacific. Markets across the board were up by 1-2%. Nikkei 225 and Sydney’s S&P/ASX 200 were up by 1.5%. Hang Seng jumped up 2.0% and Mumbai’s Sensex was up by 1.2%.

One exception was Shanghai Composite, which also had a positive day but unlike other markets. It made a fresh three year intraday low and is in a steep downward spiral since early May. It still does not seem to have formed a bottom. The news coming out of China is not very encouraging. The Chinese factor profits declined in June; China shipyards are facing vessel glut; Market is still waiting for authorities to stimulate economy, though some cash-rich companies are flexing their financial muscle and acquiring international assets like CNOOC buying Canadian Nexen for $15 billion. Overall, uncertainty is greater for Chinese markets.

European Markets:

Friday is seeing that the European markets are having a follow-through day – FTSE up by 0.2%, DAX by 0.26%, CAC-40 by 0.55% and Spain by 0.66%.

Bonds:

Yields are rising and bonds are falling. Long term treasury bonds – ZB U2 – completed a short term reversal pattern and are moving towards support, which could be either at the July 19 low or the 50D SMA. The yields on the troubled nations’ bonds in Europe are lowering easing the pressure.

Commodities:

On Thursday, Gold broke out of a symmetrical triangle on the upside. If the move sustains then the measured targeted move is upwards of 1700. Before that it has to overcome few resistances created by the previous highs. Today’s price action is a follow through of the breakout. In the recent past there were no such breakouts of symmetrical triangles on the upside. The downside breakouts continued the down trend of gold.

NYMEX Light Crude had a good Thursday to but so far Friday’s has not shaped up to be a follow through day. After turning around on June 28^th and June 29^th, crude is in the process of making an ABCD pattern. If the pattern evolves classically then the measured move would be near 95.00.

Copper is also moving up but it seems to be following global markets and not leading, which would have been more encouraging. Since July it has been making lower highs and lower lows. At the moment it is making a trip to the recent high made on July 19. Unless that resistance is broken convincingly, it remains in range bound, which is not great for global stocks.

Currencies:

On Wednesday, Dollar index (DX) completed a short term 3-candle reversal pattern. Thursday price action put it strongly is retracement mode. It broke below the recent low made on July 19, which is good for euro and other dollar basket currencies. Recently, DX has acting authoritatively as risk-on/risk-off sentiment. Its retracement is a positive for the risk-on trades across the board including resource currencies, commodities and equities.

After advancing strongly on Thursday, EUR/USD is seemingly taking a breather. It is trading with a 60 PIP range as it tries to overcome the resistance of 1.2330 created on July 19. It also may be in the process of making a reverse H&S pattern provided it retraced down to 1.2160 levels before breaking the resistance on 1.2330.

 Key Levels for the Day: