E-MINI S&P 500 SET UP FOR STRONG RETRACEMENT RALLY
On Friday I suggested the December E-mini S&P 500 was “in the zone”. This was a reference to the market testing a major 50% to 61.8% area. The zone, created by the June bottom at 1250.00 and the September top at 1468.00, was formed between 1359.00 and 1333.25.
After testing 1340.25 late last week, the market formed a closing price reversal bottom on the daily chart. Monday’s overnight action confirmed the chart pattern with a strong follow-through rally. Based on the short-term range of 1431.75 to 1340.25, the ultimate upside target is the retracement zone at 1386.00 to 1396.75. This is usually tested within 2 to 3 days of forming the reversal.
Gann angle research indicates a potential resistance cluster has formed at 1367.75 to 1368.00. This could stop the market temporarily depending on the upside momentum. One angle represents a top moving down at a steep uniform rate of speed. Another represents a slow moving uptrending angle from a major bottom. A break through this cluster could trigger a further rally into another Gann angle at 1371.75.
Fundamentally, investors are a little more optimistic than they were late last week because they feel that U.S. government officials will be able to reach a compromise over the “fiscal cliff” situation. The possibility that Greece will finally receive its much needed bailout funds is also helping to drive the E-mini S&P higher.
Keep in mind that a closing price reversal bottom usually triggers a strong counter-trend rally. It does not change the trend to up. The only way that the trend will change to up is with a rally through the last swing top at 1431.75.
A first test of the retracement zone at 1386.00 to 1396.75 is likely to attract selling pressure since the main trend is down. The subsequent break from this zone has to survive a test of the bottom at 1340.25 in order to attract new buyers. If it fails to form a secondary higher bottom then another leg down is likely. This one could trigger a break down to at least 1320.00 over the near-term.
RISK ON SCENARO DRIVES AUSTRALIAN DOLLAR HIGHER
The December Australian Dollar rebounded overnight from last week’s sharp sell-off on Monday with investors driven by signs of progress in discussions to resolve the fiscal logjam in the U.S. Additionally, there was also optimism in Europe where officials appear to be closer to releasing delayed aid for Greece.
U.S. lawmaker comments over the weekend are leading investors to believe today that a compromise was possible in talks to avert the $600 billion “fiscal cliff”, which threatens to trigger a recession in early 2013. A little clarity is going a long way this morning as investors appear to see the light at the end of the tunnel and are pricing in a possible compromise.
Adding further to the positive shift in investor sentiment is the start of discussions by European officials to resolve the funding request by Greece. The meeting which begins on Tuesday is expected to conclude with Greece receiving a two-year funding deal. Additional terms would include the postponement of any longer-term solution until after a September 2013 German general election.
Technically, the December Australian Dollar is in a downtrend on the daily chart, but Friday’s reversal bottom is generating enough follow-through momentum on Monday to fuel a possible challenge of a pair of tops at 1.0446 and 1.0432. Besides these two levels, a slow-moving downtrending Gann angle drops in at 1.0422 to provide additional resistance.
Late last week the market tested the 50% level created by the 1.0089 to 1.0446 range at 1.0268. The actual bottom was 1.0263. The new short-term range is 1.0263 to 1.0432. Monday’s surge triggered a test of this zone with the upside momentum threatening to take it out with conviction.
If demand for higher yielding assets continues today then look for the December Australian Dollar to grind higher throughout the session.