A little bit of fear ran through the markets yesterday as it suddenly dawned on investors that the free ride the markets have been enjoying could come to an abrupt end in 2010.  Once the tap is turned off then we’re on our own.  It’s the sustainability of the recovery that’s in doubt, so for now resistance levels have won the day and the bulls seem to have lost the upper hand.

There are two realities of the rally since March with the first being that it has been driven primarily by low interest rates and the printing of money and the second is that the rally is a retracement of the stupendous declines from the highs of 2007 to the March low this year.  This retracement has reached some technical levels which are all too well know with the likes of the Dow, S&P and FTSE all failing to mark new highs for 2009.

Since commencing the rally from the lows the market hasn’t really suffered any sort of correction and as we continue to drift sideways the likelihood of a move to the downside increases.

This morning sees the FTSE opening around where it closed last night, maybe just in the black and some 30 points above the lows that it hit last night when the price actually dipped below the 5200 level.  Often a big decline like the one we saw yesterday is followed by another decline that tries to shake out the bulls completely, so we’ll see this morning if there’s any continuation of the selling.

Economic data is very thin on the ground today so often in its absence the markets continue their current trend, but after the recent moves it,s hard to tell whether that’ll be in the direction of the overall uptrend or the recent declines!  The only data worth noting is from Germany’s IFO business climate and UK mortgage approvals this morning, both of which are expected to rise.

The risk aversion move yesterday meant the dollar made substantial gains in particular against sterling.  The momentum against cable was compounded by some negative UK retail sales which flew in the face of recent reports from retailers like M & S and Next who’ve actually released numbers that have surprised to the upside.  The numbers were also expected to come in slightly better as the belief was that consumers would have their last splurge before the VAT hike in January, which doesn’t seem to have materialised.  Cable found support around 1.6100 and this morning is trading at 1.6184.  Support remains at 1.6100 to 1.6075 for the near term as the pair forms a little upward channel in this bounce from the lows it formed yesterday.  Below there a test of the 1.5700 October low that can’t be discounted.

The Fed’s slightly more hawkish comments on Wednesday not only allowed the dollar to make good ground, but the move was also assisted by short covering.  The euro has for once has been the whipping boy with euro dollar down some 5% from in the last few days as opposed to cable’s 3% decline in the same time.

Needless to say the strength in the dollar caused gold’s correction to continue and quite aggressively too.  After its steep spike above $1200 the elastic band has well and truly snapped, but as yet the move to the downside hasn’t broken the uptrend.  $1100 has been mooted as a major support level for gold and this morning we see that support playing out somewhat with gold bouncing back above $1100 to $1107 at the time of writing.  But a move below yesterday’s lows will open up $1050 which is where the upward trend line currently sits.

Oil is flat to higher in sympathy of gold.  For now the $70 area it attracting buyers but once again, similar to many equity markets the commodity is struggling at these highs.