Investors sold off U.S. equities shortly after the Fed released its August Federal Open Market Committee meeting minutes but short selling dried up a little under a key short-term retracement zone. Thin trading conditions triggered a huge short-covering rally into the closing bell.

After a strong surge to the upside on the opening, the September E-mini S&P 500 began to weaken as bullish traders remained on the sidelines ahead of Friday’s U.S. employment report and Monday’s Labor Day holiday.

In its Minutes, the Federal Reserve said the outlook for the economy would have to deteriorate “appreciably” to spur fresh stimulus from the central bank. This statement didn’t sit well with investors who sold off the market into a retracement zone at 1046.00 to 1044.00. Downside momentum actually took out this zone but the daily chart uptrending Gann angle at 1042.75 stopped the break.

With all the sellers out of the way, bottom pickers gained control, triggering a strong short-covering rally into the close.

Thin conditions are likely to lead to volatility on Wednesday especially after the ADP employment number, but the market may settle into a range for the duration of the session.

The way of least resistance is down and this market looks vulnerable to the downside. It seems like just a matter of time before the bottom falls out. Low volume and thin trading conditions could be helping to prevent a sharp sell-off at this time. Tuesday’s late short-covering rally may also make bears think twice about shorting the Spoos in the hole. This means that another short-covering rally is possible before the next shorting opportunity arises.

Euro has Roller-Coaster Day

Thin trading conditions and economic reports led to a “roller-coaster” type trading session in the Euro on Tuesday. The European single currency rallied on a better than expected German jobs report, topped on strong U.S. Consumer Confidence data then, after trading sideways throughout the mid-session, drifted lower into the close following the release of the Fed minutes.

The Euro gained strength overnight after it was reported that Germany’s jobless numbers fell less than economist estimates. The market reacted as if the number was bullish instead of just slightly lower than the pre-report guess. Technically the Euro found support last night slightly in front of last week’s bottom at 1.2587. It rallied when U.S. stocks opened higher and sentiment shifted toward risk.

At 9 am CDT the Euro topped following a better than expected Consumer Confidence Report. The actual number of 53.5 blew out the consensus figure of 50.0. The surprise nature of this number drove investors back into the Dollar. At this point the Euro broke from 1.2742 to 1.2680 before settling into a trading range.

After a quick rally to 1.2701, the September Euro began to break following the release of the Fed’s Minutes from its last FOMC meeting. This market broke hard into 1.2661 as the report indicated the Fed is ready to take appropriate action should the U.S. economy deteriorate “appreciably”. The willingness of the Fed to consider taking additional steps to provide more support if the economy weakens further drove traders into the safety of the lower-yielding currencies, thus weakening the Euro.

Technically the Euro is in a downtrend, but the recent sideways action has this market poised to move sharply in either direction. A break to the downside is likely to run stops under the last swing bottom at 1.2587 all the way to the Fibonacci level at 1.2433.