S&P 500 - Weekly


Technical

There was a downside breakout in January, which was followed by further selling. Volume was heavy on this break as the pressure continued to just above the 1250.00 level. Since then, there was a substantial recovery to a little over the half way back point, but volume tended to be on the light side. A prominent down trend line was penetrated, but it now appears as though this breakout will be a false one. This market is over bought and is subject to a severe move to the downside.

S&P 500 - Monthly


Technical

This monthly chart shows the sell signal in January of this year was followed by the largest price decline since early 2003. A subsequent partial recovery has not been able to retest the trend line. Expect lower prices.

Fundamental

Some of the recent selling pressure can be attributed to a report from a London based research firm. This report said U.S. house prices would continue to deteriorate with additional declines of 30%.  There was further selling pressure when a large brokerage firm suggested the current credit crisis might extend beyond next year. Also, there is talk that an additional $170 billion may need to be written off by banks by the end of next year. The release of the Federal Open Market Committee meeting minutes showed the Fed had lowered their 2008 economic growth forecast. Based on our analysis, we can expect most economic reports in the months ahead to be weaker than market expectations. We can also expect the FOMC to lower interest rates further in an effort to support the economy rather than to raise rates to fight inflation. A weakening world economy is likely to take its toll on this market. The recent strength in futures appears to be a bear market rally and the main trend for stock index futures is lower.
 
Euro Currency – Weekly


Technical

It now appears as though the breakout to the downside, below a steep uptrend line, was a false signal. Heavy volume has accompanied the recent recovery rally, which suggests a test of contract highs is likely.

Euro Currency – Monthly

Technical

The monthly chart is bullish, as well, with a major uptrend line remaining intact. The recent long liquidation break was able stop at an area of highs and lows at the 1.5255 level.

Fundamental

Buying came into the euro after an adviser to the German government said the European Central Bank may increase interest rates after housing problems within the euro zone are alleviated.

Investor confidence in Germany fell in May for the second month due to inflation concerns. However, this bearish news was ignored, which was a sign of further strength for the euro.

The cash euro traded above the $1.58 level after the Fed’s economic forecast predicted a weakening U.S. economy.  Much of the recent strength in the euro stems from ideas that the next change in interest rates from the European Central Bank will be an increase as opposed to earlier talk of a rate cut. The main trend for the euro is higher. Expect contract highs to be tested.

Swiss Franc – Weekly


Technical

Although the weekly chart of the Swiss franc is not quite as bullish as the euro currency chart, we continue see bullish indications. For example, the steep uptrend line that was recently broken on the downside failed to follow through. In fact, prices have now rolled back above this trend line. Technically, we see this market moving higher, but not dramatically.

Fundamental

The Swiss franc has advanced against the U.S. dollar due to a strong Swiss economy, higher commodity prices along with upward pressure on Swiss interest rates. Although Swiss fundamentals are not quite as bullish as those of the euro zone, we continue to expect prices to trend higher.

British Pound – Weekly
 
 
Technical

Of all the major currencies, the British pound has the weakest chart pattern. We can expect the sell stops that are likely building under a major trend line to be taken out soon. However, volume patterns suggest that once this trend line is broken there will be little follow through to the downside. We can expect the euro to continue to gain on the British pound.

Fundamental

The British pound temporarily firmed after a report showed U.K. retail sales declined less than expected in April. On balance, U.K. fundamentals are among the weakest of the Group of Seven countries. Expect prices for the British Pound to move sideways, at best.

Japanese Yen - Weekly


Technical

The recent correction has taken prices to the January highs, which have held. It now appears as though buy stops may be building above a steep down trend line that comes in at this week’s highs. Higher prices can be anticipated with a move up to the .9950-1.000 area.

Fundamental

The Japanese yen advanced as Asian stocks declined. This resulted in the liquidation of the yen carry trades.  Carry trades are established when investors obtain funds in a country with low borrowing costs and invest in another country with a higher interest rate structure.  Profits are made by taking advantage of the difference in interest rates between the two countries. Expect higher prices for the Japanese yen as lower stock index futures cause further carry trade liquidation.

Canadian Dollar – Weekly

Technical

A steep down trend line has recently been penetrated on the upside on increased volume and with follow through. The 1.0288 high from last February will probably be surpassed. The main trend for the Canadian dollar is higher.

Fundamental

The Canadian dollar rallied after a report showed inflation in Canada accelerated last month. This suggests the Bank of Canada may be less inclined to lower their benchmark interest rate at their June meeting. Higher commodity prices also tended to support the Canadian dollar. Further gains are likely.

Australian Dollar – Weekly

 
Technical

The Australian dollar recently broke above a double top formation to make new contract highs. There is a rule of thumb that says double tops seldom hold and triple tops almost never hold. The action on this chart proved to be no exception. Further gains appear to be in store for this currency.

Fundamental

The Australian dollar advanced after the Reserve Bank of Australia indicated they spent “considerable time “at their last meeting discussing additional interest rate increases.

The Australian dollar equaled its highest price ever against the U.S. dollar. High interest rates along with rising commodity prices should continue to take the Australian dollar higher. There is some talk that the Australian dollar will eventually trade even with the U.S. dollar. My analysis suggests this is a likely scenario.

10-Year Treasury Note – Weekly

 
All charts provided by APEX

Technical

Although the main trend appears to be higher, it looks as though the congestion pattern that is currently being formed will continue to be built. A recent breakout to the downside, below a support area, showed only limited follow through. The next short term move is likely to be to the upside above a minor trend line that has recently formed. It is likely that any upside breakouts will not follow through. Although the short-term outlook is only neutral to a little friendly, the longer-term outlook remains bullish.
 
Fundamental

Prices firmed after the IMF warned of the potential for further problems within the U.S. housing industry. In spite of the slightly bearish on balance PPI report, futures were able to extend their gains. The PPI was up.2%, when a .4% increase had been expected and the PPI, excluding food and energy, was up .4% when a.2% increase was anticipated.

Currently there is a 92% chance that the FOMC will leave credit policies unchanged at their meeting on June 25th and there is an 8% possibility of a 25 basis point reduction in rates to 1.75%. Financial markets are also pricing in a 24% chance of a 25 basis point increase in rates at the September 16th meeting. My work suggests there will be no increase in rates this year. To the contrary, most likely the Fed will be forced to lower interest rates one or two mores times before the end of the year.

Some analysts believe Fed Chairman Bernanke will not lower interest rates further because of inflation concerns. In the recent past, we have already seen what Bernanke has done when faced with the choice of fighting inflation or stimulating the economy. He has chosen to cut interest rates, which is likely to be the case this time, as well. Expect higher prices for credit market futures, at least through the summer months.

For more information on this article, I can be reached at 312.242.7911 or via email at alan.bush@archerfinancials.com .

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.