Yesterday’s Action – Dojis, Bearish Engulfing and Dark Clouds

Tuesday had started on a positive note. In the early session, the US futures continued their uptrend that they had acquired in the middle of Monday’s trading. However, the upward momentum could not continue for too long and just like they did on Monday, major indices turned around midday on Tuesday – this time it was on the downside. The volume was higher than Monday but below average.

After making day’s high in first five minutes of trading, Dow Jones Industrial Average tried to take-out that high at noon but could not. That was the signal for a turn around and it gave most of the day’s gain by 3:00 PM New York time, when it again unsuccessfully tried a recovery. The last hour of the days saw major indices gave up all the gain for the day and then some.

DJIA was barely up for the day at +2.71 points and S&P500 was barely down at -.018. DJIA and S&P 500, both made doji candles. The doji has come after a short rally that saw DJIA and S&P500 make three month highs. Last few days candles are also showing bearish shadows. Together, it does not bode well for the current mini-uptrend, which started on August 2nd, especially if they close below the lows of August 7th and August 10th.

NASDAQ composite made a dark cloud, though its intraday price-action was similar to that of DJIA and S&P500. It is trying to convincingly fill the down-gap that it created on May 3rd and May 4th. The dark cloud is not good for the upward movement and if the tech-heavy index closes below 3000 then the chance of it testing 2950 level will increase.

The small cap, Russell 2000, also made a bearish candle. It its case it was a bearish engulfing. The index has just broken above the upper line of a symmetrical triangle. With today’s action, it is coming back to test the breakout line. A move within the triangle – below 789 – will negate the pattern and a move above 806, the high of August 7th, will reconfirm the pattern.

Dow Transportation Averages is continuing its out-of-step dance with DJIA. It rose by +0.4%, though like others, it too closed in the lower half of the day’s range. DJIA is trying to moving down from the high last few days whereas Dow Transport is trying to move up from last few days low.

Overnight Action:

Global capital markets continue to be directly and indirectly beholden to the European financial crisis. If the direct news from Europe indicating worsening or improving situation is not emanating then it is the speculation about the action of policy makers across to the world to do or not to do something about the global economy which is affected by the events in Europe.

Monday-Tuesday overnight market action was based upon the speculation that central banks will provide monetary stimulus. Tuesday-Wednesday overnight market action was influenced by the scaling back of those expectations. Some of it was based upon the improving economic news – not perceptible to many – and some to the fact that investors have accumulated enough gains in the recent weeks to become fearful and short-term risk-averse.

Asia – Blow Hot, Blow Cold – Cold For Today

Yesterday’s news was hope and today’s news was caution. The overall impact was that the Asian capital markets gave up yesterday’s gains and then some. Shanghai Composite gave up -1.1%, Nikkei 225 -0.1%, Hang Seng -1.2%, Taiex -0.2% and S&P/ASX 200 -0.3%. Fortunately for South Korea and India, the markets were closed due to holidays. Perhaps, they will play catch up tomorrow.

Shanghai Composite is back in a jiffy to test the 3-year low made on August 1st. A successful test will give rise to a double bottom pattern and a failed test will be pretty ugly. Despite witnessing a down day, Nikkei 225, Hang Seng and S&P/ASX 200 are continuing their bullish patterns. The emerging pattern of Nikkei 255 is the weakest of the three and Sydney’s strongest.

Futures – All May Note Be Well

S&P500 futures made a three month high in the hour before the New York session open. In the process it touched the upper line of an upward sloping flag. Since then the futures have retreated and are now knocking at the lower line of the flag. The pattern is not necessarily bearish as it is forming after an advance. However, if the price breaks below the lower line or if it stays range bound in a narrow horizontal band before breaking down the pattern may become a topping one like a rounding top.

On the hourly time frame, the 9-period RSI is coming off an oversold reading. Almost every time, since early July, any such oversold RSI reading was followed by an advance of 15-to-55 points for the eMini. It is to be seen if this stretch is going to continue or fail.

Forex Market is Perturbed – Maybe May be Not

The day’s currents are favoring risk-off trade and the forex market is reflecting it for the short term and not necessarily the fundamentals of individual currencies. Resource currencies – Aussie, Kiwi and Canadian dollar – are under pressure this morning.

Kiwi is under greater pressure than others. It turned back at a confluence of resistance levels near 0.8200 and is not approaching the 50% retracement of July 25th to August 6th advance. In the process it broke below a support level.

Aussie is following suit though, it has not yet broken a short term support – 1.0436 low made on August 2nd.

Canadian dollar is better placed than other two. Maybe because of Israel-Iran sabre rattling, that is supporting the crude oil.

Commodities – Risk-Off is On

NYMEX crude is hanging there at 93 handle. The news that Israelis civilians are preparing for an Israel-Iran war is perhaps countering the risk-off sentiment for the crude to some extent. It seems to be in a holding pattern, just near a support level, for the next move, which most likely will be to the upside. NatGas is up for the day but the pressure is still to the downside.

Gold continues to trade within a triangle, now moving towards the lower bound. Overall the immediate direction is not very clear though the bias seems to be lower as a descending triangle is emerging since July 2011. Silver is similarly placed though it’s descending triangle started to form in January 2011.

Dr. Copper, a somewhat proxy for the global economy, is not showing strength. It is moving towards the low made August 2nd. However, after making a six-month low on June 4th, copper has couple of higher lows.

Coffee is continuing its downward slide. It has closed lower in 16 put of last 19 sessions. In the process it has retrace to 78.6% level of June 14th to July 11th advance. Sugar is similarly placed.

Corn, wheat and soybean are retreating from their sharp advance and are in the process of making a topping pattern. Wheat is further along in the emerging bearish pattern than other two.

Bonds – Still Sliding Down and Yields Rising

30-Year US Treasury bond has broken below the lower limit of a horizontal channel. Wednesday’s early price action continues to be negative for the bonds. Thus yields are facing an upward thrust.

Key Levels for the Day: