Risk Appears to be Back On Ahead of Next Week’s U.S. Employment Report

Although it is a holiday week, volatility should be highespecially during the beginning of the week. After a mid-week slowdown, lookfor volatility to increase again on Friday when the August U.S. Non-FarmPayrolls report is released.

Although it is a holiday week, volatility should be highespecially during the beginning of the week. After a mid-week slowdown, lookfor volatility to increase again on Friday when the August U.S. Non-FarmPayrolls report is released.

A key asset allocation shift took place in the marketsearlier in the week that played a role in today’s markets. On Wednesday,T-Bonds topped and stocks bottomed simultaneously. This was the signal thatrisk was back on, but it took the positive comments by Bernanke today to givetraders a little clarity and conviction to play the long side of the equities.Stocks should continue their rally next week which should keep pressure onT-Bonds and the U.S. Dollar. The only market likely to weaken against theDollar will be the Japanese Yen. A shift in sentiment and an intervention couldtank the Yen.

High volatility was the theme on Friday in the Forex, equityand debt markets. Today’s trading session can basically be described as atwo-sided affair. Surprised? No. The markets were ready to move, but were justwaiting for a few kind words from a key Fed official.

At first the equity markets rallied on news of a better thanexpected Second Quarter GDP report, but turned lower ahead of Fed ChairmanBernanke speech at the central banker’s conference in Jackson Hole, Wyoming.Once it became clear to traders that Bernanke was going to be more upbeat thanusual, stocks bottomed and mounted a strong rally into the close.

T-Bonds, which were already in the hole after the GDPreport, accelerated down during Bernanke’s speech and the U.S. Dollar slowlybegin to take on a bearish appearance. Inside of the 9am to 10:30am CDT timeperiod, looking at the charts, clearly someone turned on the risk demandswitch.

The economically sensitive Euro rallied, paused, and thenrallied again to close a little better for the week. The British Pound foughtback from a morning sell-off to finish slightly lower. The Japanese Yen feltselling pressure from greater demand for risk. The strongest rallies, however,were in the higher yielding Australian Dollar and New Zealand Dollar.

During his speech, Bernanke clarified a few points. One, hesaid that the Fed decided to purchase more longer-term debt with proceeds fromits bonds that mature for both technical and stimulus reasons. Two, he explained his current view of theeconomy and three he said the Fed is not out of bullets and that it has severaloptions.

Bernanke, however, may have helped turn the stock marketshigher when he said the Fed has the willingness to use more quantitative easingif necessary. The fact that he didn’t suggest it “was necessary” may have beenthe key factor triggering today’s turnabout. Another potentially bullish factorwas the fact that the Fed did not change its 2011 forecast.

Technically here is what we are looking at. The SeptemberE-mini S&P 500 held the low for the week at 1037.00. This kept Wednesday’sclosing price reversal bottom formation intact. The key to triggering a strongrally remains the follow-through to the upside.

At this time there are three areas that have to be overcomein order to trigger a breakout to the upside and perhaps a retracement back to1082.25. First, the market has to take out Thursday’s high at 1061.75. Second,the Gann angle at 1065.25 has to be pierced with conviction. Thirdly, themarket has to close above the 50% level at 1065.25. If these three things occurthen in my opinion the shorts will be forced to cover.

Higher yielding currencies traded better, driven up bygreater demand for risky assets. This morning’s better than expected U.S. GDPreport helped ignite the initial rally, but it was positive comments from FedChairman Bernanke which triggered the second leg up.

Technically the rally in the Australian Dollar was setup onWednesday with its closing price reversal bottom pattern. This bottom at .8770helped form a range with the main top at .9221. This also helped create aretracement zone at .8995 to .9049. This retracement zone is the first upsidetarget of the current rally.

Today’s rally was also triggered by a technical breakoutthrough a key downtrending angle from the .9221 top at .8921 today. Based on myprice and time calculations the next major price cluster is at .9049 on August31.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More