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Market Firm to S&P Downgrades but Overbought

|Includes: FXE, PowerShares QQQ Trust ETF (QQQ), SPY

Today the market gaps fueled by higher than expected growth in Chinese GDP.  Emerging markets, commodities and Brazil lead the rally today on these news.

Also today we got a positive Spanish bond auction.

The market has completely ignored the S&P downgrades on France, Austria and the ESFS bailout fund. 

I think is a positive that the market stops paying attention to this rating agencies which have shown during the last 5 years or so to be most of the time wrong and late in ther risk classifications. 

The market has given up a big part of its gap up gains but the leading stocks and NASDAQ have held firm which shows good overall strength.

The S&P 500 is starting to get overbought but looks like it could hit its previous high at 1350 after a consolidation or pullback.

As you can see from the charts the market is getting overbought and it will be hard for it to push higher unless we get a very positive catalyst.

Since we are in earnings season, better than expected earnings could propel it higher.

If not, we are going to probably consolidate here or pullback for a while. 

Also, intermediate term sentiment, as measured by is at a very bullish level which normally causes a decline or at least a period of consolidation.

Another thing to watch is the EUR/USD.  We got a failed rally attempt last week when it recovered its lower trendline of its downward channel. The bulls got hammered on the S&P downgrade news.

Today it is once again trying to recover its lower trendline. A close over 1.2760 should trigger a short covering rally.

As you can see in the chart the Commitment of Traders shows that speculators are historically short while commercial players are extremely long.  There is a lot of "fuel" to generate a powerful short covering rally which should be bullish for the markets.

Best regards,

                     Victor Riesco