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Morning Stocks: Reversal of Fortune Puts the Bear Camp Back in Control

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Global equity markets were mixed overnight in the wake of a Chinese currency devaluation. Surprisingly the biggest losers were European market measures with Asian equities clearly under moderate pressure. Not surprisingly Chinese shares were higher along with Russian shares following the 2% devaluation of the Chinese currency. US stocks were moderately weaker with the Chinese move prompting fears of a currency war. Cushioning European and US shares is news of an improvement in German ZEW August current conditions index. However, the economic expectations index of the ZEW declined by 4.7 points in a potentially countervailing development of the initial ZEW release. The US economic calendar begins with NFIB business optimism index for July that is expected to inch higher from the 94.1 reading in June. July Canadian housing starts are forecast to have ticked higher compared to the 202,810 level last month. US corporate earnings of interest are expected from Symantec after the close of business.

S&P 500: Reversal action from the overnight highs is at least partially justified in the wake of the uncertainty spawned by the Chinese currency move. Some might suggest that the Chinese move confirms the concerning condition of their economy and their ongoing reliance on export activity. However, global equities are still hopeful of fresh Chinese stimulus and that is dampening the downward motion to start today. We can’t discount a quick return to and below 2075 directly ahead. Some analysts think that the move by China confirms they are very concerned about the state of their economy. Near term downside targeting is seen down at 2072.30 in the September S&P.

Other US Indexes: While Twitter shares were up 9% Monday on a new partnership deal with the NFL and reports of insider buying and the shares of Caterpillar were lifted on favorable press from Barron’s article over the weekend, internal fundamentals are thrown out the window in the wake of the Chinese devaluation. Like the S&P, the Mini Dow is in the midst of a key reversal move and a possible quick return to last week’s lows is likely. Following a significant gap up move yesterday, the Nasdaq might be the most technically vulnerable to a sea-change in sentiment off China. We would at least expect the September Nasdaq to re-fill the gap down at 4528.75 and we also can’t rule out a return to the early August lows.

TODAY’S MARKET IDEAS: Equities typically don’t like uncertainty and the Chinese devaluation moves appears to spark significant uncertainty. While the move might ultimately spark increased export activity and boost growth in China, such moves are no longer done in a vacuum. Near term support and a target is seen down at 2082.75 in the E-Mini and we can’t rule out a range down extension toward the next critical chart support level down at 2071.75. The bias is down but it could be sharply down if the Chinese move rekindles global currency war talk in the coming trading sessions.

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