Stock markets in the US opened on Monday around the same level as Friday’s close, which marked a week of gains recovering the losses of the previous week. The S&P500 closed at 2905, up 1.21% on the previous week, the DJIA at 26155 (+0.94%), and the NASDAQ at 8010 (+1.39%) in a week in which Apple presented its new products in a presentation that disappointed some analysts. There are renewed threats of sanctions from the US against Chinese imports, with China threatening to stop any further trade talks in the event of new sanctions. This is bad news for global trade and, possibly, for global demand, yet stock markets rose on the belief that the tariffs are being used more as a negotiation tool than as a weapon to unleash a full-blown trade war.
Furthermore, economic and corporate data in the US continue to be consistent with further value creation, the record growth of the stock market notwithstanding.
In this situation, the S&P500 approached its all-time high once again:
After touching the all-time high area, the price has now rebounded downwards and currently seems to be aiming for a new test of the support at 2880 as it trades below 2900 again.
Should this test happen, we could spot a double top formation, which would confirm the divergence we see forming on the indicators.
At that point, the closest dynamic support would be key for the index to start rising again or head to a possible test of the support at 2800-2790.
So far, the index has managed to shake off all the bad news coming from the geopolitical and economic spheres, but a slight loss of momentum seems evident.
Moreover, if we take a look at the NASDAQ, the hypothesis of a correction seems more probable:
The chart shows the index trading below both the static and dynamic supports. A short position here would be possible for the most aggressive trades with a first target of 7200-7195 points. Those seeking confirmation might want to wait for a break below 7380.
With the stop to be placed above the all-time high, the size of the position must take into consideration over 200 points and be calculated accordingly.
Should the trade be successful, the second target would be at 7000 points.
Now let’s take a look at the short trade we took on the DAX, which we’ve been following over the last three weeks:
The first movement brought us to close half of our position at 11900 points, keeping the other half with a stop right above the 38.2% Fibonacci retracement.
The Fibo level seems to be holding up and could push the index back towards 12000 and beyond.
On the macro side, Draghi’s statement following the ECB interest rate decision announcement last week, as anticipated, was all focused on reassuring investors and the stable underlying growth of the Eurozone, despite a slowdown in growth, repeating once again that the growth rates registered in 2017 were unusually high and the current growth should not be compared with such rates. Yet, after being pressed at the Q&A session, he admitted that the underlying risks caused by trade instability, the emerging market currency crisis, and a possible rise in financial market volatility are undoubtedly present. He also noted that the political issues within the Eurozone need to be taken into consideration, even if the spill-over effect of delicate situations such as the one represented by the new government policies in Italy, has been limited.
I do believe that these statements are a bit too diplomatic, and that the threats to global demand and within the Eurozone are definitely more present than Draghi believes, or pretends to believe.
Should the situation deteriorate due to the abovementioned risks, the macro situation would confirm the bearish view on the DAX and push the index towards the real target of the movement, which is at around 11750.
A note on the EURUSD pair:
The pair has been trading within a tight 200-pip range between 1.1520 and 1.1720 since mid-August.
Even if the chart seems to show a possible rise given that it once again bounced off the lower boundary of the lateral band after a fairly fast recovery from the downward spike linked to the Turkish Lira crisis, a medium-term long trade would be confirmed only by a clear break above 1.1720 and then 1.1835.
We don’t have much high-impact news set to hit the market this week. I would just keep an eye on the UK consumer price index on Wednesday for all GBP-related pairs and on Draghi’s speech on Tuesday, even though overwhelming surprises from the ECB chair are rather unlikely.