Morning Market: Risk On

by: Hale Stewart

Right now, we're in the middle of a "risk on" trade. Money is flowing into equities and out of treasuries. Also of importance is the dollar's drop, which is a direct reaction to the euro rallying and the belief that the EU situation is coming to a resolution. This is obviously commodity bullish.

Let's start with the equity markets:

The best example of the latest rally is the run in the IWMs; which are in the middle of a very strong rally. Prices are in a clear uptrend and have moved through important resistance levels on a regular basis.

On the daily chart, notice that prices have moved through resistance levels and three of the EMAs -- the 10, 20 and 50. The 10 and 20 day EMA are both moving higher, and the 10 has crossed over the 20. Since prices have moved through the EMAs, the next area of resistance is the 200 day EMA. However, at some point I would expect a sell-off to some important technical level, with the 50 day EMA being the most likely.

In contrast to equities, the 7-10 year treasury sold off the week before last and spent last week consolidating losses.

On the daily chart, we see that prices are consolidated below the 50 day EMA and remained there for last week. Also note the 10 and 20 day EMAs are moving lower with the 10 day crossing below the 20.

The above charts clearly show the "risk on" trade is in full force. However, I am still concerned about the lack of support from the economic fundamentals. In short, the economy appears to be teetering on the 0% growth mark. This is not a level of economic activity that would support a strong risk on trade. In addition, there is little coming down the pike to indicate increased economic activity.

As it appears that the EU situation resolving, traders have moved out of the dollar, as seen on the 5-minute chart.

The daily chart shows the severity of the sell-off, with the dollar moving below all the EMAs. Also note the shorter EMAs are both moving lower and the 50 day EMA is moving sideways.