Markets Stage Midday Reversal to Close at Highs, Yen comes under Pressure

9:32 PM ET – With the S&P 500 testing key technical support near the 815 area in the middle of the trading day, and the market not responding well to the ECB’s rate decision and subsequent comments by Trichet, one couldn’t be blamed for sensing the ominous palatable feeling of a big down day. However, selling pressure abated across a number of investment complexes and saw the metals, energies, agricultures, Dollar-Bloc currencies, and equities. The risk aversion trades, in particular Yen-based crosses and fixed income products felt the pressure as money flows and short covering buoyed things higher.

The real question for tomorrow in front of a three-day holiday weekend, is how do we as traders play the next move. During our Netto’s Number market commentary on Sunday night where we previewed the week’s action, the focus was the key inflection points on the Euro and ES. I have updated numbers that will follow in subsequent paragraphs traders should use as a short term guide to playing this rally, as well as keeping in mind the bigger picture. Keeping in mind how well the currencies are trading, it will be this section I focus my key inflection points on as harmony of a market is one of the three key points I look at when evaluating a trading opportunity.

Key Inflection Points

USDJPY (US Dollar / Japanese Yen Currency) – This cross gave us some early warning that risk aversion, the dominant theme of the early part of the week, was beginning to wane in terms of determining market sentiment. The cross bottomed out at about 3 am ET and mounted a very meaningful bounce, despite the recent equity correlation, as the ES was making new lows throughout the morning. 8957 is the point of control for this cross. Should the USDJPY break back below this level, I suspect the longer term daily and weekly trend have a very good shot at taking hold again.

If today’s rally continues, a move back to 9101 is a nice spot to take profits from any intraday long positions that have been compiled en route to this destination.

EURUSD (Euro US Dollar Currency ) – I’m just not sure I’m a believer in this rally as the key level to assess longer term direction is the 13390 and as we pointed out in the weekly preview, a break below this level sends things down to 13071. We eclipsed that level briefly before participating in today’s late surge. I remain circumspect in this move and feel safer spreading Gold against this cross if you think the dollar is vulnerable.

GC G9 (Feb COMEX Gold) – 835 is a key level as gold has sold off with the rest of the commodity sector for the most part of this week. The level to see if gold has swung the pendulum back to the bulls is the 835 level. Gold on a weekly chart is still undergoing a very methodical stair-step up. Any price action below this level should be used for long positions that are nimble and have quick exits. To the downside, 798 is a ripe spot as we have some solid Fibonacci levels there, as well as key psychological levels to see how gold holds up.

I will be putting on a workshop on trading options on Saturday, January 24 at 10 AM ET to go over the dynamics of gamma trading these volatile markets. There will be some very applicable strategies discussed during this webinar. To learn more visit http://www.osoktrading.com/products/item9.cfm

Best of luck in the markets