Equity markets in North America have been retreating this morning in what appears to be a normal round of profit-taking following yesterday’s big afternoon rally. Despite some pressure following the release of the widely anticipated U.S. retail sales numbers, equity markets have held well above yesterday’s lows, which suggest that the balance of sentiment in the market may be continuing to slowly shift over to the bulls.

Although U.S. retail sales fell by 2.8%, worse than the headline consensus estimate of a 2.1% decline, considering the steep drop markets took earlier in the week, the result may not have been as bad as some people had feared. Recognizing that the credit crunch may have dominated consumer sentiment through October, the November data may be more indicative of the current state of the U.S. consumer. Investors should note that two weeks from today, November 28, is the Friday after U.S. Thanksgiving.

This date, commonly known as Black Friday, is traditionally the busiest shopping day of the year in the U.S. Similar to tax freedom day for consumers, Black Friday usually represents the day when retailers cover their costs for the year and make all of their profits for the year between that date and New Years. Considering that a lot of the credit market turmoil appears to have stabilized this month, reports on Black Friday sales may be particularly significant this year in gauging U.S. consumer sentiment and provide an indication of how long or how deep the economic slowdown may be.   

Two other data points also suggest that there may be some signs that conditions may not be as bad as feared. So far this month most of the data we have been seeing has been for September and October and includes the worst of the credit crunch. One of the first data points for November, the preliminary University of Michigan Consumer Confidence came in at 57.9, above the 56.7 Street estimate and last month’s 57.6 level, which suggests that the worst may have passed for consumer confidence.

Meanwhile U.S. business inventories declined by 0.2% in September, more than the 0.1% expected by the market. As inventories tend to build in the early stages of recessions and decline as recessions move toward their trough and recovery, declining inventories may suggest that the inventory realignment process may be underway, an early step that may start to lay the groundwork for an eventual recovery. The October and November numbers, however, may once again give a better indication. 

While the economic data received today suggests that conditions may not be as bad as feared earlier this week, trading action in indices also suggests that the bottoming process may be continuing. Yesterday, the Dow Industrials (US30 CFD) and S&P 500 (SPX500 CFD) successfully retested their October lows and key support levels near 8,000 and 825, respectively. The brief dip by the Dow just under 8,000 and breakdown by the NASDAQ 100 (NDAQ100 CFD) to a new 52-week low yesterday before staging significant upside reversals, may have been bear traps that may have shaken out some of the last of the weak hands.

There is still the possibility that some of the selling pressure this week may have come from forced liquidations to meet fund redemption requests. Note that for some funds, investors need to give 45 days notice if they want to take out cash at the end of a quarter or year. Since this we are six weeks from the end of the year, it appears possible that some funds may have been liquidating positions to meet redemption requests, build bash balances or meet margin calls. Should redemption requests decline once the deadlines have passed, however, some of the pressure on equities may ease heading into December.  

Meanwhile, despite today’s softness, underlying technicals suggest that a significant trend change may be underway. First, note that once again at the time of this writing over 90% of the component companies of the S&P 500 are trading lower today but despite this, markets are well above yesterday’s lows. This suggests that although sentiment seems to be quite bearish, markets may be getting oversold and underlying support may be building. Also note that the Dow Industrials have continued to hold above 8,500 as they did on Tuesday. Combining that low with yesterday’s drop to 8,000 and today’s test, it appears that a traditionally bullish reverse head and shoulders pattern may be forming with a neckline near 8,900. Also, note that positive divergences between indices and their MACD indicators continue to build, a sign that downward momentum may be easing.

As such, it appears that indices may continue to hold in the near term above significant support levels near 8,500 and 8,000 for the Dow, 1,150-1,175 for the NASDAQ 100 (NDAQ100 CFD), 875 and 825-850 for the S&P 500 and 525 for the S&P/TSX 60 (Toronto60 CFD). Initial upside resistance levels appear near 8,900 for the Dow, 1,240 for the NASDAQ, 910 for the S&P 500 and 550-575 for the 60.

One final thing to note, although commodity markets are mixed today, copper, widely considered to be the most economically sensitive commodity, has jumped toward the $1.70/lb level after staging another successful test of $1.60 yesterday. This suggests that sentiment toward global economic conditions may be improving. Meanwhile, gold and silver have also been rebounding, which suggests that concerns over the inflationary potential of government and central bank actions may also be increasing again.

Upcoming Free Seminars:

In the coming weeks, Colin Cieszynski will be making a number of free presentations for accredited investors across Canada.

Location          Date                Time                Topic                                      

Montreal          Nov 19         12:30 and 6:30      Trading Opportunities
                                                                          in Volatile Markets

For more information on these and additional CMC Markets seminars, please go to CMC Markets Seminar Registration Page at:

http://www.cmcmarkets.ca/en/content/education/free_seminars.do

Upcoming Trading Webinars:

In the coming months, Colin Cieszynski will be presenting a series of free webinars on trading for accredited investors from coast to coast. 

Date                Time                Topic                                      

Nov 19             4:00 pm ET      Trading Opportunities in Volatile Markets

For more information on these and additional CMC Markets seminars, please go to CMC Markets Seminar Registration Page at:

http://www.cmcmarkets.ca/en/content/education/free_seminars.do

This commentary is based upon technical analysis. Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider any of the fundamentals of an underlying company, and as such is inherently uncertain and should not be the only factor considered by an investor in making an investment decision. 

This commentary is provided for informational and educational purposes only. Nothing contained in this commentary is intended as investment advice or a recommendation or solicitation to buy or sell. All opinions expressed are current as of the date of publication and subject to change without notice.

CFDs and FX are highly speculative and can involve a high degree of risk. Investors in CFDs and FX should be prepared for the risk of losing their entire investment and losing further amounts. Trading accounts are available to Accredited Investors only. CMC Markets will not open accounts except in jurisdictions in which it is registered or exempt from registration. CMC Markets is an execution only dealer and does not provide investment advice or recommendations regarding the purchase or sale of any securities. Investors are responsible for their investment decisions. CMC Markets will not determine an investor’s general investment needs and objectives or the suitability of a proposed purchase or sale of a security. CFDs are distributed in Canada by CMC Markets Canada Inc. as dealer and agent of CMC Markets UK plc. CMC Markets Canada Inc. is a Member of the Investment Industry Regulatory Organization of Canada and Member CIPF. Contact us for further details.

Note that any references to CFD prices or price changes are sourced from CMC Markets' proprietary trading system Marketmaker™. CFD and FX Accounts are available to accredited investors only.

 Copyright 2008, CMC Markets. All rights reserved.