Thursday: Stocks Ease So Does Volume

Early Thursday morning – New York time – the US futures were heading higher from the decline of Wednesday. YM, the DJIA mini futures, was even threatening to form an inverse head-&-shoulder pattern. However, the US unemployment claims report punctured the optimism and the futures lost their steam. For rest of the day, not much positive happened for the markets and YM did not complete the inverse H&S pattern.

Greece and the Eurozone crisis again crept back into the limelight – vacation season must be over for the Europeans. Seems like the vacation did not improve the moods of Germans and they were back to blowing-hot-blowing-cold – here and here and here. The mutterings coming from Greece is also not purifying the muddy waters.

The bottom line is that global equity markets remained in a funk on Thursday and the gloom spilled over to Asian session on Friday. Major US indices have completed the short-term reversal patterns and are now moving down looking for support levels. If their up-down upward moving pattern since early June holds – current summer rally – then the support level may come at around 12890 for DJIA, 1376 for S&P 500 and 2975 for NASDAQ within next 7-10 days. However, September has been the worst month for all major indices for over 60 years so the probability of this pullback to last longer and deeper is significant.

Dow Jones Industrial Averages declined by -0.9%, S&P 500 by -0.8%, NASDAQ Composite by -0.7%, Russell 2K by -0.8% and Dow Jones Transportation Average by -1.5%. The volume decreased across the board. Declining stocks led the advancing stocks by more than 2-to-1 margin.

Overnight Action: Chinese Overhang

The Asian session too did not bring any respite to the global markets. In fact, news about Chinese economy exacerbated the problems. The New York Times reported on China’s manufacturing slow down and mountains of unsold goods. Dallas Fed also released a report saying that China’s slowdown may be worse than official data suggest. This was also a fine time for investors to revert back to fretting about the prospects for central bank action. Bottom line – Asian investors sold off commodity and technology shares, which had powered the recent advance.

Shanghai Composite fell by -1.0%, Nikkei 225 by -1.2%, Hang Seng by -1.3%, Kospi by -1.2%, S&P/ASX 200 by -0.8%, SENSEX by -0.4% and Jakarta Composite by -0.4%. Not a good way to end the week for Asian markets.

The Shanghai Composite is having a very tough time. On Friday, it made a fresh low since the week of March 9, 2009. The low is close to the 78.6% Fibonacci level of the advance from financial crisis low to 2009 high. Even during the recovery, Shanghai Composite could retrace only to 38.2% of the sharp 2007-2008 decline. During this time, S&P 500 recovered more than 78.6% of the decline and the Mexican stock market made all time high. These two indices are near the highs whereas the Chinese index is near the lows of the recovery period.

One glimmer of hope is that the index is making a collapsing wedge and a break above the upper limit will be a strong reversal. Another hopeful sign is that FXI, the ISHAREs FTSE China 25 Index, is not following in the footstep of the Shanghai Composite. FXI made a low in October 2011. Since then it has formed a symmetrical triangle. The broader market is facing stronger downtrend than the big-caps. If big-caps assert the leadership then the index would turn around too – big if.

Currencies – Confounding Yen

Despite high national debt, Japan’s currency has remained strong during the financial crisis. Japan is facing its own terrible fiscal cliff and legislation needed to sell bond is languishing in the Diet, suggesting that the government could run out of money by the end of October. So who would have ‘thunk’ that Yen will get stronger? But that is what it is doing.

After breaking above an upward sloping flag, the USD/JPY – a contrarian move – USD/JPY has fallen back into the flag and is now knocking at the lower bound.

A similar thing is happening to AUD/JPY too. It had broken above a horizontal channel and was on its way to the measured target of 85.60, when the idiosyncratic Yen struck. Now the pair is back in the channel. It is at the 50-day SMA but a break below it will increase a likelihood of testing the 79.50 support level.

Commodities – Gold Strikes

The reinvigoration of the expectations for QE3 by the FOMC meeting minutes has enabled gold to overcome two downtrend lines in past few days. The end of the week price action may have injected some vacillation on parts of the gold-bugs but the current bias still remains upward.

After hitting couple of measured move targets – double bottom and horizontal channel – NYMEX crude oil hit a resistance zone of 61.8% Fibonacci retracement level and a down trend line. On Thursday, crude made a bearish engulfing candlestick formation and is ripe for some pullback. If the support level near 92.94 – a broken resistance – holds then it can climb back up to the 78.6% Fib level near 103.

Bonds – Topping Patterns Revived?

Like AUD/JPY, 30-year US Treasury Bond had broken out of a horizontal channel (down in case of bonds) and like FX-pair, it too has come back within the channel, nullifying the downward target. 

Pullback Continues

Overall assessment is that all capital markets – equities, commodities, bonds and forex – are indicating a short term pullback in favor of the risk-averse traders.

Key Levels for the Day: