The die is cast for a rate cut Wednesday, and the markets are unfolding in accordance with the scenario laid out here
Let's look at the action in these trades that comes in anticipation of a
ease, which would essentially make real short-term rates -- rates after inflation -- 0%, and the lowest nominally since July 1961.
Gaps on Monday out of handle consolidations -- flags, if you wish -- in stock index futures add, technically, to the constructive case in December
Now that we have a month's worth of price-bar data, a critical mass of at least five gaps, laps or thrusts off double-bottoms within that time frame is affirming nascent upside momentum and providing additional evidence for the bullish camp.
The Dow futures chart below depicts the runaway potential present in all three markets. Although a tail in the S&Ps casts doubt about their recent lap out of a consolidation, Tuesday's higher close hints the tail will fail. Two consecutive closes above Monday's tail in the S&Ps will be evidence of a failure.
Keep in mind that such signals are frequently more powerful indications of market direction than the original (tail) signal itself. A tail failure in the S&Ps will provide further evidence of growing upside inertia in stock index futures.
(DXZ2:NYBOT) continues making good on its downside breakout after falling out of its extended consolidation. Since the thrust close (indicated by the green circle on the following chart) below the lower boundary of its triangle, the dollar has finished down or flat for six sessions. Swing traders will take partial profits at these levels and sell pullbacks from the low at 106.89 and 107.30 resistance.
(GCZ2:COMEX) spurted as much as three bucks an ounce since last week's column. A protracted run in gold requires fear of inflation. Free money -- real short-term rates of 0% -- is definitely inflationary. With Republicans now in control of both houses of Congress, their cut-taxes-and-spend policies will also spur inflation in the short run.
As European and U.S. monetary policy makers both look poised to cut rates this week, their Australian counterparts appear on track to hold rates steady. The Australian central bank will maintain the short-term interest rate differential with the U.S. at more than 3%.
Lower rates in the U.S. dry up demand for short-term fixed income products, leaving money to flow to wherever the best risk-free (government) rate is available. Higher rates Down Under should benefit the
. Upticks in gold will also be positive for the Aussie dollar.
The December Aussie (ADZ2:CME) achieved the initial measuring objective out of its
ascending triangle at 0.5610 after a gift re-entry opportunity on the test of the breakout. The next test higher is likely to be at 0.5644.
Cuts in interest rates -- even after a 12th cut -- mobilize vast quantities of liquidity and have the potential to be highly stimulative.
(CTZ2:NYBOT) may be serving as confirming indicators of a potential turnaround in the economy, as well as of inflation. Rallies in these key commodities have almost always preceded economic improvement and stock market rallies.
While pundits grumble about weakness in the 3.1% third-quarter GDP figure, bear in mind that that number is the average for the entire post-World War II era, a period of unprecedented economic advancement.
Cotton has far exceeded the initial objectives
specified last month as the top of a downtrending channel and went on to hit a one-year high before massive profit-taking Tuesday. Copper is also showing itself as a momentum market and will likely get a boost from the industrial construction sector now that Congress has finally inked a
terrorism insurance bill.
In markets not directly related to expectations of an interest-rate cut, notice that December
(LHZ2:CME) and February 2003
(PBG3:CME) are surging. December
(CZ2) hit a four-month low on negative
technicals and fundamentals and January 2003
(FCF3:CME) futures are flirting with a seven-month high.
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
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