Cliff Wachtel's  Instablog

(As of approximately 12:30 GMT, 7:00am EST)

Introduction

On Monday, before the U.S. markets opened in the U.S. we warned that while stocks had recently remained range bound, there were worrisome signs of more downside.

We saw the following daily S&P chart. The "Doji Star" (cross-shape) candlestick of June 19 is marked by the white hand. Near term support of around 877 was shown by the horizontal green line.

"However [on Friday June 19] the S&P ominously printed another disturbing Doji   Star (cross shaped candlestick). These suggest indecision and often a change in the direction of the trend. Thus at the top of rally, they can foreshadow a coming reversal.

For example, if you look at a daily candlestick chart of the S&P, note the double dojis on June 10-11, and the three day drop that followed. Given that stocks have risen 20-30% world-wide since March, and that the recovery has not suggested similar growth in the coming year, the markets are vulnerable to a bigger pullback than we've seen thus far. Looking at recent support on the S&P, another 30 points down to around 877 just as a technical test of this support level wouldn't shock anyone. News on economic fundamentals like unemployment, housing, spending, and earnings will most likely determine if that support, if hit, holds steady or collapses for deeper support tests."

Thus while many say that Monday's pessimistic World Bank forecast, that cut 2009 growth forecasts for most economies, was the main cause of the world-wide retreat in stocks, at most it was just a catalyst, with the above noted downward pressures just waiting for something like this to release them.

The Trading Opportunity

For all the below instruments, the new pessimism has created opportunities to open trades around new tests of support and resistance that in most cases have not been reached for 6 weeks. This allows traders to place stop loss orders near these levels to keep risk low compared to the potential gain if prices bounce back towards the chosen target exit price.

Currencies

Significantly, the new gloom established that not just the JPY, but even the recently maligned USD, are still perceived as safe havens and tend to rise against other majors when fear and risk aversion rule. Given the dollar's recent troubles, some had questioned whether this was still the case. We have our answer. The USD is still seen as a safe haven and is still likely to rise when stocks drop. Given the recent decline of the USD against most other currencies due to the recent rapid expansion of  USD supply and debt, this is a welcome source of support

Similarly, the CAD and AUD retreated with commodity prices and fears of more to come.

The good news for FX traders is that a variety of currency pairs involving the USD, JPY, CAD, and AUD are testing levels of support and resistance, providing traders with chances to open position near these levels with nearby stop loss orders to keep risk down.

World Stock Markets

As noted in the above introduction, there were already thick fumes of uncertainty in the world stock markets. The World Bank announcement was the spark that ignited them.

As of this writing, Asian stocks again closed down for June 23rd, Europe has opened mixed, and struggles to stabilize.

The big trading opportunity for stock index traders is that support levels not tested since mid-May are now being tested or approached. As noted above, opening trades near these levels allows traders to place relatively close stop losses to minimize risk compared to the potential gain if the index moves as hoped.

Bank Earnings Loom Ahead

The biggest near term threat to the possible recovery? Note that Second Quarter Bank earnings will be coming out in less than a month. The current crisis began with very bad news from the banks, and the recent rally began with surprise reports of bank profits. Earnings announcements are less than a month away. Rumors and "whisper numbers" will come sooner, especially if positive, since that could steady or even lift world stocks (and allow banks to sell more stock to help recapitalize, just like Bank of America and others did over the past months.).

Commodities

Given the above pessimism on the recovery and strengthening of the USD, commodities too are testing multi-week support. Crude and broke recent support of $68 and has fallen below $67, while Gold fell past $923 to settle around $918.

As above, traders may have opportunities to enter trades near these levels with relatively tight stop losses to keep risk down in what could be a volatile time for commodities.

Economic Calendar

Breaking News to Know:

CHF    Swiss Trade Balance of 2.01B beats forecasted 1.86B

Coming News to Watch

 3:00pm GMT  USD                Existing Home Sales

Conclusion & Disclosure

The author may have positions in the above instruments. To understand financial markets you need a grasp of what's happening in all of them. For income stocks visit:

http://highdividendstocksguide.blogspot.com

For daily and weekly reviews of what's happened in world Forex, Commodities, and Stock Indices, visit http://worldmarketsguide.blogspot.com