Stocks Called Sharply Lower
as Traders Take Risk off Table

by James Hyerczyk, Brewer Futures Group, LLC | May 4, 2010

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U.S. equity markets are trading sharply lower overnight. This weak start is expected to spread to the U.S. opening. Global traders have taken risk off the table overnight as the Euro failed to rally the past two nights after an agreement to bailout Greece. The bailout was approved over the week-end between Greece, the European Union and the International Monetary Fund.

Traders feel that the money is “too little, too late” to revive the economy and that the newly approved austere financial cuts will plunge the nation even deeper into recession. Furthermore, investors are also beginning to buy into the thought that the Euro Zone fiscal problems are spreading and that the once thought to be contained sovereign debt problems will eventually reach global proportions.

Technically, the E-mini S&P 500 is currently giving about close to half of Monday’s rally. The charts are now indicating that yesterday’s rally may have just been a 50% retracement of the 1216.75 to 1176.75 range. This retracement zone is 1196.75 to 1201.50.

Last week ended with the S&P 500 posting a weekly closing price reversal top. This is usually a bearish signal which triggers the start of a 2 to 3 week correction. The trend turned down on the daily chart, but it is going to take a break through last week’s low at 1176.75 to confirm the weekly reversal.

June Treasury Bonds are up sharply overnight in response to the weaker stock market and general dislike for risk overnight. As mentioned late last week, the T-Bonds are breaking out on the weekly chart, which is a strong signal of higher markets to follow. Upside momentum is strong at this time which could drive the T-Bonds to the high for the year at 121’05.

Although a flight to safety rally is taking place overnight and upside momentum is building, some traders may be convinced to back off from the long side because of Friday’s U.S. Non-Farm Payrolls Report. This may help limit gains. Today’s upside move will all depend on whether traders are going to become aggressive and react to the news coming out of the Euro Zone, or become passive and limit trading because of Friday’s jobs data.

June Gold is slowly inching its way toward $1200.00. Speculators are driving gold higher in anticipation that the fiscal problems in Greece will eventually lead to the break up of the Euro. At this time they are aggressively hedging hard assets against the demise of paper money. The more the problems spread across the Euro Zone, the higher gold is expected to move. The stronger Dollar may help to limit today’s gains, but overall, the uptrend remains firm.

With traders become more risk averse overnight, June Crude Oil is under pressure. For the past four days, the bulls have been in control, but the overnight action suggests that the bears are attempting to take over once again.

Bullish traders had been driving up crude oil as they anticipated the Greece bailout deal would lead to improvements in the world’s economy and thus an increase in demand for energy products. This doesn’t appear to be the case because now it looks as if the Euro Zone is going to be mired in its fiscal problems for some time and less likely to demand more oil.

Technically, the daily chart suggests that the current break is likely to continue down to 84.22 to 83.53 before slowing down.

Copyright © 2010 James Hyerczyk
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