S&P – European and Asian markets slumped in overnight trading, dragging down U.S. stock index futures before the bell. Recent data seems to confirm recent fears that the U.S. slowdown is spilling over to outside markets. Germany's Ifo Business Confidence Index saw its largest drop since the 9/11 attacks, falling to 97.5 from 101.3 points for the month of June; Citigroup trimmed earnings forecasts for the UK banking sector by 40 percent; and, National Australia Bank, Australia's largest lender, wrote off A$830 in U.S. mortgages, causing shares to plunge. Back in the States, traders are expecting today's 10:00 AM EST report on New Homes Sales to show a drop to 505,000, which could lead to more woes in the troubled lending sector. Weak home sales figures and skyrocketing foreclosure rates have prevented a recovery in banking shares. Mortgage rates have also climbed on expectations that the Fed may begin tightening rates by year-end, suggesting housing prices may not bottom in November-December of this year, as many had expected. One positive that can be taken amid all of this dismal data is the fact that the U.S. economy was the first to feel the impact of the credit crunch and, in theory, could make the quickest recovery. Banks have already written off enormous sums of bad debt and seem to be erring on the side of caution when giving their earnings outlooks. Another positive implication of a slowdown overseas is the possibility of rapidly decreasing inflation. Consumption of raw materials – namely food and energy – may slow significantly, aiding a U.S. recovery. In addition to New Homes Sales, the Durable Goods Orders report will be released at 8:30 AM EST, and is expected to show a contraction of 3 percent. September e-mini S&P futures bounced off of the 38.2 percent Fibonacci retracement resistance area on Wednesday, suggesting traders may not be confident in the market's chances of a recovery. The 9-day moving average may be on the verge of crossing the 18-day average to the upside, which could be seen as positive in the near term. The market is at a turning point in the short term. Crossing the 1293 mark – which is both chart and Fib resistance – could swing the market in favor of the bulls, while a close below the 1240 support area could lead to further declines. Momentum is showing strong bullish divergence from both price and RSI, suggesting a positive short-term bias. Support comes in at 1241.50, 1229.25 and 1207.50, while resistance can be found at 1275.50, 1297.25 and 1309.50.
Crude Oil – Oil futures have edged slightly higher in the early going this morning on comments from Israel and Nigerian militant group MEND. Israel upped its rhetoric, saying that military options are available if negotiations with Iran fail. This is hardly fresh news, but may have shaken the resolve of some Oil bears. Traders seem to be more focused on suggestions from MEND that it will attack major pipelines that feed two of the nation's four major refineries. Today's trading may have a slightly bullish bias due to prices dropping rapidly over the past two weeks and concerns that supplies may be disrupted. The bullish enthusiasm may be somewhat subdued due to worries that a global economic slowdown may continue to trim demand. Also, the odds of an attack on Iran prior to the November election are fairly slim, as Israel could have a falling-out with U.S. over what might be seen as sabotaging the election and disrupting Oil supplies. September Crude Oil technicals remain bearish, at least in the near term. The 18-day moving average is in danger of crossing through the 50-day to the downside, which may be seen as bearish over the mid-term. Price action over the past two sessions, while positive, suggests that prices are consolidating before moving lower. If the price of the September contract falls below the $120 mark, the market may see more downside. Momentum is moving lower this morning, despite the rally, hinting that bulls may not be very confident in their opinion. Support comes in at 123.86, 122.23 and 120.94, while resistance can be found at 126.78, 128.07 and 129.70.
Cocoa – Cocoa prices have gotten a boost from a weaker Dollar and a stronger British pound, leading to arbitrage buying. Cocoa has plummeted this month on improved growing conditions in the Ivory Coast. Traders were expecting that some of the problems that had plagued the midcrop may also hamper the main crop, leading prices ahead of themselves. The government in the Ivory Coast is also stepping up efforts to spay crops, which would decrease the likelihood of black pod and other diseases. The real story in Cocoa may be the fund activity, with many funds bailing out of their positions, sparking this plummet. The market has been a favorite of many hedge funds and the sharp drop in energy and grain prices may have forced many funds out of Cocoa to meet margin calls and de-leverage their positions. Technically, September Cocoa remains weak. The chart pattern shows the market consolidating around the 2750 area, which could mean more downside lies ahead. Fibonacci support at 2654 may be a key area going forward. If prices are unable to stop their slide at 2654, prices could test April lows. Support comes in at 2725, 2706 and 2678, while resistance can be found at 2772, 2800 and 2819.
Rob Kurzatkowski, Commodity Analyst