It’s been a volatile week in the treasuries. Most of the volatility is being caused by conflicting fundamentals and news. Earlier in the week, the September Bonds and September T-Notes showed signs of topping because of the technical reversals down and the higher than expected PPI. The reaction was to the downside on an intraday basis because it looked as if the inflationary news was going to force the Fed to raise rates sooner than expected.

Before these markets could confirm the reversal tops, problems with Fannie Mae and Freddie Mac resurfaced, and the treasuries went back to flight-to-quality mode. Yesterday these financial markets showed signs of a top once again because of higher crude oil and a possible solution to the Freddie Mac situation.

It is clear that these two events are the key issues. What has also become clear from the selling that has occurring at new highs is that this market wants to top. It looks as if the combination of higher energy and a solution to the Freddie Mac credit crisis will be the combination to knock this market down.

The charts indicate that the Bonds have a straight shot at breaking to 116-08 and the Notes to 115-14. Confirmations of yesterday’s reversal tops are necessary to trigger this break. Furthermore, a weekly close under 117’15 in the Bonds will be an additional sign the market may be topping.
Without any major financial news today and the market expected to go into holiday mode next week, do not be surprised by a profit-taking break today.

EQUITIES
Equity markets look strong since the reversal bottom on Wednesday. The energy market rally could not break the indices and the Freddie Mac credit crisis seems to be coming to a head. Traders just want clarity of that situation as the inability of the Fed and Treasury to make a decision to nationalize both Freddie and Fannie continues to keep money on the sidelines. Yesterday’s rally in the Yen and the Swiss was more evidence that investors want solid information and stability on which to base their investment decisions. As long as the Fed wavers on a decision, these markets are going to be choppy. Once there is clarity and conviction by the Fed, traders can commit to a side in the market.
Since the recent break in the indices stopped short of 50% corrections of the July/August rally, there seems to be a slight bias to the upside developing. Any news regarding Freddie Mac and Fannie Mae is likely to trigger a rally as flight-to-quality cash which has been parked in the Treasury Bonds is likely to flood the equities markets.

The September E-Mini S&P is in a position to rally to 50% for the week at 1283.25. If strength develops at this level, then look for another push to 1288.50. The stronger the upside momentum, the greater the possibility of a rally to 1295.50. On the downside, 1274.50 is minor support.
The September E-Mini Dow Jones futures contract held its 50% to 62% correction earlier in the week. A normal retracement up makes 11569 to 11636 a potential upside target.

CURRENCIES
All currency markets have rallied on short-covering as the longer-term fundamentals are still indicating a stronger Dollar. Today is a critical day as these markets may begin to feel downside pressure again. This break is likely to retrace at least 50% of the first rally off the lows. If these contracts find buyers on the retracement, then look for higher markets next week. If the retracement does not attract fresh buying, then the rally should fizzle and the main down trend should resume.
Japanese Yen and Swiss Franc traders need stability in the U.S. financial markets to put downside pressure on these contracts. Bullish Canadian Dollar traders will be looking for a continuation of the Gold and Crude Oil Rallies to provide support. The British Pound contract is the weakest as economic news is likely to outweigh the U.S. credit market problems. Finally, the Euro will weaken if Crude Oil cannot maintain its upward pace.

ENERGIES
October crude oil broke out to the upside over 117.40 as expected. The main trend turned up on the move, but the market is running into minor resistance at 120.33 to 122.28. On a correction back down, this market has to hold 116.77 or the rally will fail. If strength builds again today, and the market can hold above 122.28, then it has a clear shot at 130.00 next week.
Fundamentally, the situation between Russia and Georgia is the most bullish factor. Any escalation in the conflict is likely to send Crude sharply higher.

METALS
December Gold rallied to the first objective at 820. There does not seem to be any buying pressure overnight so this market may correct back to 811.00 to 803.00. This may be a buying opportunity as the main trend on the daily chart turned up yesterday. Any breakout to the upside could trigger more short-covering to 888.00 by next week.

September Silver is also building a base for a rally. There was no change in trend to up yesterday despite the strong rally. This market is dependent on the Bond and crude oil markets today. Weakness in bonds and strength in crude oil could cause a huge short-covering rally today. The charts indicate that 15.88 is a possible target over the near term.

October Platinum remains weak because of bearish fundamentals. Longer-term, the global economic slowdown is hurting demand for autos and thus platinum for catalytic converters. Although platinum may piggy-back a move in Gold and Silver, this market is too thin to trade.

September Copper is building a support base and poised to rally higher. A weaker Dollar could trigger a strong short-covering rally over the short-term. Longer-term, global economic weakness is causing demand to fall and inventories to rise. Technically this market has reached retracement resistance at 3.54. This may trigger a correction to 3.39.

GRAINS
Demand is the key to sustaining rallies in the grain complex. A weaker Dollar may bring in foreign buyers. Sharply higher crude oil and gold could trigger a surge in soybeans on new fund buying. A stronger Dollar, however, could trigger a pull-back to 1268 ¾.

Fresh buying from hedge funds is needed to sustain this rally. Since weather is not a factor at this time, this market needs higher crude oil and a lower Dollar to provide support. The market is finding resistance at 625. A breakout over this price would change the trend to up. Support will come in on a pullback to 564 ¾.

December Wheat is showing the most strength despite USDA projections of a record crop. The main trend is up. The short-term range is 771 to 992 ¾. This range has created a support zone at 841 ¾ to 825 ¼. A weak Dollar may trigger demand. Higher gold and crude oil could lead to more buying today especially if hedge funds return in a big way. There may be a pull back to 872 if the Dollar strengthens, but the longer-term charts cite 1026 as the next major upside target.

SOFTS
September Cocoa should continue to build strength especially if the Dollar weakens substantially. The charts indicate the potential for a rally to 2915 to 3003. There are supply issues coming out of Cameroon as well as quality of bean issues in the Ivory Coast, but overall growing conditions are ideal. A decrease in Ivory Coast output may also support a rally along with a weaker Dollar. More selling in the British Pound is likely to curtail any gains today.

September Coffee has been building a support base and is poised to break out over 1.4225 to turn the main trend higher. Talk of the Dollar weakening is encouraging aggressive buying.

October Sugar is finding support at key technical levels. A weaker Dollar and strong global demand could launch another leg up. Sugar-based ethanol traders will also be focusing on crude oil today. A bullish crude report will help support ethanol and sugar.

December Cotton confirmed a daily reversal from Wednesday, but the main trend remains down. This market is going to need more demand and higher grain prices to rally. Otherwise expect more sideways trading. 70.88 to 71.85 is resistance.

September Orange Juice is fading from its high this week as tropical storm Fay missed key growing areas. This market should not get too bearish however as a major portion of the hurricane season is just starting. Look for a breakout rally to start over 107.65. Do not press the short side at current levels and continue to watch for the next storm.

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