Wednesday 01/02/2012 8.00 PM GMT

U.S. stocks rallied Wednesday as economic data from China and Europe beat market expectations and a gauge of U.S. manufacturing showed expansion too so February has started well for the bulls and the dollar has eased but this is just about to be reversed and the dollar will push higher.

If you asked the average man in America, Euro Zone, China or the UK are they optimistic about the global economy? You wouldn't get a positive reply but for now, the risk currencies are moving higher at the dollars expense but we are near important resistance levels now and some downside is likely.

The global economy overall is slowing not expanding and the euro zone fiscal crisis is still very much alive which points to a stronger dollar long term and now, its time to look for turning points.

Position Summary

AD: Up again at 1.070 but a stochastic reading above 90.00 and an RSI reading in overbought points to a correction short term back to around 1.050 – sell any down turn in momentum.

BP: The Pound has surged again up past 1.57 and sits above 1.58 and the best way to play this one in our view is look for momentum down turn and wait for a move back below 1.58 to set up a move to 1.55 support.

CD: We are short and were up at par and overbought and tomorrow this is a good sell on a momentum down turn. Momentum is overbought so expect a downside break next week to target 97.00.

EC: We are lightly trading the short side from 1.30 and have relatively wide stop back behind the gap at 1.32. Were testing the gap again and expect it to hold on a close basis – if not short trade short into 1.32 with stop behind the gap and look for more downside from here to at least 1.30.

Note: this market recently recorded the biggest net short position ever, as indicated by the CTFC Net traders positions – the market had simply become to bearish and this rally is stops being hit on speculative positions rather than fresh buying and when stop hitting is over, the Euro will continue its downward path to the recent lows of 1.27...

JY: After banking a small swing trade profit last week, we are waiting to get long the dollar as its now oversold. Look for a break up through 76.50, supported by momentum with a target of at least 77.00 with protection below 76.00.

China Manufacturing Data – Not as Bullish as the News Wires Paint

China's official purchasing managers' index showed the factory sector expanded slightly in January and the separate report from HSBC showed slight contraction.

The January figures is of course distorted as output was boosted by strong holiday season demand for food and other consumer products. November's figure had dipped well below the 50-level that indicates expansion, in the first contraction in manufacturing activity since early 2009.

However a relatively early Lunar New Year holiday boosted production on the official figures but the big picture they don't show the trend in China. Furthermore, a competing survey, the HSBC China Manufacturing PMI , a seasonally adjusted index designed to measure the performance of the manufacturing economy, was nearly unchanged at 48.8 compared to 48.7 in December, suggesting a "moderate deterioration in Chinese manufacturing sector conditions," HSBC.

The big picture though ( which investors and brokers are tending to ignore at present) shows the economy clearly slowing. The recent Export data remain sluggish, with the index for new export orders down 1.7 percentage points to 46.9. Imports were also down at the same level

Export-driven southern coastal regions are seeing thousands and thousands, of small companies going out of business and laying off tens of thousands of workers. HSBC said factories continued to reduce payrolls while reducing output due to weak orders, relying when possible on stock reduction.

China is going to slow up a lot more and while investors seem to think China is bullish the reality is a slow down which will get worse.

Euro zone – Germany Strong Rest of Zone Weak

Euro zone manufacturing activity declined for a sixth straight month in January, there was a small upturn in Germany which failed to offset the bloc's smaller economies which are contracting.

Greece for example which is in talks about a debt restructuring to secure a second bailout package to avoid a default, saw a record drop in production for January and a sharp decline in new orders, which will lead to yet more job losses.

Greece even if it does secure a debt package doesn't look like it will be able to repay it and will go under at some point and Portugal is also in trouble and will need funds. These countries are small but Italy and Spain are not and will come under pressure in the coming months.

Germany is strong but Germany doesn't want to bailout euro zone and until it does put up cash, other euro zone countries will remain under pressure.

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