Introduction

Asian markets posted another big decline in the overnight hours. The Chinese and Japanese markets declined in the range of -1%. Their follow through from our own sell off yesterday did not continue into the futures trading this morning. Early indications pointed to a positive opening and those signs held through until after the unemployment claims data was released. The ECB interest rate decision and press conference had a see saw effect on the market that may have pivoted around the OK unemployment claims data.


Mario Draghi sent the European markets into negative territory hours after the unchanged overnight ECB interest rate was left unchanged. Draghi outlined downside risks to EU economy and hinted at another decrease in overnight rates. He maintained his outlook for a “gradual recovery” later in the year threatened by the possibility of weaker than expected global demand. The somber tone and negative outlook reversed the earlier pop in European stocks and pushed U.S. index futures into negative territory. Later in the day the ECB decision combined with growing fear over tomorrows jobs number to send the euro sharply higher versus the dollar.

The rest of the day was a see-saw of dips and peaks over and under the break even point. Eyes are on tomorrows NFP and Unemployment reports and what they may tell us about the state of the economy. It seems that now “as is” is no longer OK for the rally to continue. Strong numbers equal strength and a quicker start to Fed tapering. Weak numbers equal weakness and that is never good for any rally. Some analysts lowered forecasts for NFP after today's unemployment claims but the general consensus is for new jobs in the range of 175-185,000. Unemployment is expected to hold steady at 7.5% but I suspect there is a chance for this to come in at a surprising lower number.

The Data Today

First lets touch base on yesterday's ADP figure. The number reported was 135,000, more than last month but less than expected and definitely not in line with the idea that jobs creation is going to pick up. This may have been the reason for yesterday's sell-off. Today the employment picture saw new light with the release of Challenger job cut numbers. Challenger reported that planned layoff's were 41% lower than May of last year. This is the third month of declines in planned layoffs and perhaps a sign that less jobs are being lost. The decline in planned lay-offs may also explain the downward trends in unemployment claims.


Initial claims for unemployment came in at 346,000, in line with estimates and down from last weeks upwardly revised 357,000. The four week moving average gained 4,500 to hit 352,000. Initial claims has been holding fairly steady since the first of the year. What was looking like the start of downtrend now looks like a continuation of the previous steady pace of claims except that now that level appears to be below 350,000 instead of above it. This number does not have to decline to impact unemployment levels but it would help. Less lay offs as seen by Challenger and more jobs reported by the NFP could work as well.


Continuing claims dropped to 2.952 million from a mild upward revision to 3.004 million. This data still looks like it could trend lower but may not. The Challenger numbers are encouraging while the ADP figures are not. Total claims gained by a small 68,000 to 4.646 million. This snaps a three month downtrend but leaves the total claims near five year lows. The combination of less lay-offs and less unemployment claims leads me to think that unemployment may be lower than expected as well.



Euro Boosted By Draghi

U.S. focused fears and the statements of Mario Draghi helped the euro to strengthen versus the dollar. The move began precisely at 8:30 with a break above the 1.314 level and near term resistance. Additional intraday momentum came into play around 11:00 AM when the pair crossed above the 1.3200 level reaching a three month high. Today's move appears to be bullish but leaves the pair sitting beneath an important resistance level and the top of a three month trading range. On the daily charts my MACD and stochastic indicators are bullish but weak and don't really support a break out at this time. I think this move is based more on fear of what's happening here and what the Fed might do than any expected improvements in the EU. The pair hit resistance around 1.3300 and fell back under selling pressure. Look to the 1.3200 level for near term support.

EUR/USD

The Yen Strengthens

Abenomics aside, the yen is now in the hands of technical traders. The currency's slide, orchestrated by Abe and Kuroda, may be over for now as profit taking and speculators drive the yen higher. Adding to the pressure is the growing speculation over the U.S. economy, jobs growth and the start of tapering. The yen had been holding steady in the early morning trading but fell through the 99 level at 10:30AM. The pair bounced from a support around the 96 level but looks poised to continue down to 95 at this time. Longer term I still see the yen moving lower versus the dollar, this near term decline in the USD/JPY is being driven on fear and speculation, not policy change or economic conditions. Regardless, I do not think we have seen the last of the 100 level for this pair. A retest of 100 or even the 102.50 level is not out of the picture.

USD/JPY

Gold Trade Remains Volatile

Gold prices shot back up to +1415 again. This makes the fifth day in a row for the metal to trade over and under $1400 in a roughly $20 range. Gold prices may be forming a triangle consolidation pattern with $1420-$1425 marking the upper edge. A break above the is level would be bullish for gold. Until then I am neutral on gold but remain bearish on the Gold Index. The index has been trading in a tight sideways range over the last week while gold itself has fought to maintain $1400. The index is trading just over the short term 30 day EMA and the 23% Fibonacci. It is also below the 38.2% retracement and a proven area of resistance. I think it will take a bullish move in gold to get the index to move higher and break resistance. Failure of gold to hold the $1400 level will likely bring the Gold Index back down to $111 to retest support.

Gold Index

Oil Rises On EU Outlook

The possibility of the EU returning to growth in the later part of the year put a bid in the price of oil. Crude gained over 1.3% today to trade just under $95 a barrel. Despite the rise in the price of oil the oil index fell in today's trading. The index has fallen back to test support around the $1365 level. The index is below the short term moving average and may face more downward pressure, especially if the NFP number is not satisfactory. Longer term indications are weak for this index and lead me to believe we have seen a top in the oil sector for now. Look to $1365 for support going into tomorrow and $1425 as resistance for any rallies.


Story Stocks

There were a few earnings reports today that managed to break through the NFP chatter, if only for a minute. Two of note are Smuckers and Ciena, both beating Wall Street expectations. Smuckers reported EPS of $1.22 versus the expected $1.15. Smuckers was able to increase earnings due in part to lower commodity costs and despite a drop in total sales. The company went on the guide in line with expectations. Traders were not happy with these results, sending shares lower by more than 3%. This move breaks the short term moving average, $100 support and confirms a triple top formation from April and May. There may be support around $95 and the longer term 150 day EMA but I will await confirmation of that before making any trades.

Smuckers

Ciena, a computer networking company, announced a top and bottom beat that sent the stock shooting up in the pre market trading. On a non-GAAP basis the company reported EPS of $0.02 versus and expected loss of -$0.10 per share. In addition to the revenue and earnings improvement the company provided a good outlook for the coming quarter. The stock jumped more than 15% during today's trading and led others in the group higher as well. Other stocks benefiting from this boost were JDSU, FNSR and CSCO.

Ciena

The Transports

The Dow transports have been a market leader during this pullback. The index has been moving down for nearly three weeks, every since hitting its new high around 6,500. The Dow Transports are now sitting on a support level coincident with the breakout form the bullish triangle which occurred at the beginning of last month. This level will be very important over the next few days, especially tomorrow. A break down of this level could result in a drop to 6,000 or lower.

Dow Transports

The Cyclicals

The Morgan Stanley Cyclical Index is in much the same shape as the Dow Transports. The index made a break out of a triangle formation in the beginning of last month and has now retraced back nearly to the break out level around $1,165. If the rotation into cyclicals has merit I would expect to see support step into this market soon. At this time closest support exists at $1,165 and $1,100. The NFP report could be the deciding factor for this index as well. A good number could raise fear of tapering and lead to more selling while a bad number is just bad. An in-the-middle number may be just what we need, one that supports the recovery without increasing the likelihood of tapering.

MS Cyclical Index Daily

Longer term the Cyclical looks neutral. Momentum is lacking direction and stochastic is in the middle of the range. The primary trend remains up but there is significant downside risk in the nearer term. This index could drift lower for several week before hitting long term trend line support.

MS Cyclical Index Weekly

The NASDAQ

The NASDAQ found support in mid afternoon trading that sent it back into positive territory. At this time the index is sitting on support and indicated lower. Bearish momentum on the daily charts is strong but may have reached a peak. Longer term momentum is still bullish but in decline. The 3,400 level may prove to be a buying opportunity, at least for the short term. I think it will take a really bad NFP to cause the markets to break down on economic weakness and a really good number for them to break down on Fed tapering. If the number comes in as expected we may get a relief bounce from this level taking the index back up to retest the highs around 3,500.

NASDAQ

The VIX

The VIX has climbed to reach the top of the year-to-date range. The $17.50 level has proved significant twice this year since gapping below that same level at the year's start. This marks the extreme of fear we have seen so far in this leg of the rally and marks an important turning point in the market. This is the time when traders must decide if there is more to fear now than before or if the fear is no worse than anything else the market is dealing with. The pin bar formed today suggests that fear may be about to ebb but that is a hard call to make on the eve of such an anticipated NFP report. As I said before I think we'll need to get a really, really good number to cause taper fear to drive selling and a really bad number for economic weakness to drive fear. I am looking for the VIX to decline but I will reserve an official stance on that until after the NFP release tomorrow. The market is irrational and we know this.

The VIX

The S&P 500

Today was one of the craziest market days I have seen for some time. First the futures were up, then they were down, then the market opened and moved up, and then it moved down, and then it moved up tracing a range of +17 points. The intraday bounce started when the index fell below the 1600 level and carried it back into positive territory and up to the daily high. This kind of action speaks loudly of indecision and positioning ahead of tomorrow's NFP. This report is important in general but there is a lot of pressure being placed on it this time around. Once again this index, like the transports, the NASDAQ and the Cyclical Index is at an important technical juncture. A break below will have bearish implications with downside targets of 1575 and 1550 in the near term. A bounce will take the index back to retest the recent all time highs. If we get a bounce the all time highs will be resistant, this is a good area to watch for more sign of reversal.

SPX 60 Minute

I don't trust today's rally into the close. Even though market breadth was about 4:1 the market could just as easily be down by 14 pts tomorrow morning. We'll just have to wait for NFP.

SPX Daily

For now the future of the rally lies in the hands of the NFP report. The markets have corrected some and now have room to move up again. They are also sitting on important technical levels. A break down of the market from here will likely lead to more selling going into the summer as we await more economic data. It is hard to get view of what the economy will look like in three to six months, hopefully the NFP will paint a rosy picture, but not too rosy. The technical picture is changing although the primary trend is still up. It is a questionable buying time, but it is also a questionable selling time. We'll have to wait until tomorrow's releases to know one way or the other.

Until then, remember the trend!

Thomas Hughes