A new all-time high was hit last week on the S&P500, which closed the week at +0.8% at 2930 points. The DJIA did even better, closing the week 2.3% up at 26744 points.
The NASDAQ disappointed a bit (confirming last week’s graphical analysis): -0.3% at 7987. With the deep correction in February, this year has shown that the US stock market is not invincible and that negative news such as trade wars and the Fed raising interest rates can spark substantial volatility. But the rebounds following each deep correction show that with the strong push by corporate tax cuts and the consequent strong corporate earnings, coupled with strong macro data; money still flows on the stock market, and while interest rates are not at a level that might be considered attractive in such a situation, it has still sparked substantial portfolio gains.
So far, investors have declared the US as the winner in the international trade saga, as shown by the strength of the greenback, although this week started under a different mood.
Here is the situation on the S&P500:
The all-time high is visible on Friday’s candlestick, although the index closed the day down and is continuing to decline as we speak.
Once again, the trigger for the bears came from trade war fears, with industrial and technology shares coming under pressure from the announcement of new tariffs and possible further retaliatory measures from China. From a technical point of view, the daily chart continues to show a loss of momentum and prices at the moment are testing the support area and trading below 2920. It is easy to spot 2900 as an important price level to consider when making trade decisions.
Looking at the H4 timeframe, however, doesn’t provide much encouragement for making a trade:
The loss of momentum is also visible on this lower time frame, but that is clearly not enough to decide on a short trade at this point in time. Given what has happened so far, the index may well bounce off the support area it is testing right now and attack its highs once again. On the other hand, should the index go below 2910-2900, then a short trade targeting the two lower static supports showed in the H4 chart would make sense, as it would confirm the divergence on the indicators, at least in the short term. We should pay close attention to the very intense week we have in terms of macro data in the US, which might act as a catalyst for a rise in volatility.
As mentioned in the introduction, tech indices aren’t having the best time, as we anticipated last week. The NASDAQ is in a very interesting situation:
Last week, we envisaged an aggressive short trade on the supposition that the price would remain below the dynamic support (too early to call it a resistance). The possibility is still there, as the price is still hovering around that area. Again, this trade requires a large stop above the previous high, and the size of the position must be carefully considered. Moreover, should the NASDAQ please us with a downwards movement, the pressure might spill over to the S&P500, which would confirm the short there as well.
Moving on to Europe, let’s take a look at the German index:
We left it with prices “kissing” the 38.2% Fibo retracement, a few ticks from the stop of the half position we left open.
The stop was unfortunately taken but we still took some nice profits home. Now the index is again in an interesting situation, as it is testing the dynamic resistances that have been driving prices down since the end of May. The first two days of this week and the movements of the US indices in response to macro news will be key here. A new short could be opened below 12400. I would consider going long only on a strong break above 12500 and even better to wait for a test of the dynamic resistance. Both trades would have a very nice risk/reward ratio.
The end of last week was shaken by UK Prime Minister Theresa May’s speech, which in no uncertain terms blamed EU officials for rejecting her latest Brexit plan and for not showing any willingness to compromise as the UK makes efforts to advance negotiations, imposing diktats that the UK cannot ever accept. The EU is actually in a position of strength here and is completely taking advantage of it. Personally, as I have already said a few times, I would not see a no-deal Brexit as a good solution for either the UK or the EU, as the latter might put the UK under pressure, but also, the risk for the EU is having an enormous offshore jurisdiction just at its border which is in the top tier of the financial arena, something that none of the EU jurisdictions can claim to be.
The British Pound took a sharp dive on Mrs. May’s speech, dropping from 1.33 against the USD to almost 1.30500. The pound suffered similar movements against all the majors. Today’s pressure on the DAX and other European indices should also be seen through the same lens.
What’s next for the GBP?
One thing is for sure; until the impasse is solved, the pressure on the British pound is likely to continue, and the rebound from the lows could be short-lived.
It is interesting to note that the euro did not react as badly as it has in the past in similar situations. It held its position against the USD and the EURGBP pair took off with a 150-pip rise.
Here is the situation on the EURUSD pair:
1.1720 level, which we identified as a trigger for a long trade, was reached and surpassed, and the pair reached 1.18 to retrace to the psychological resistance. We still believe in this trade and we are maintaining the position and the stops as planned, while checking on the possibility of reaching 1.1835, where we can start to consider moving the stop level to the break-even point. Prices have remained within a narrow band for quite some time, so we want a lot of pips from this trade!
Above 1.1835, the potential is there for a rise of a few hundred pips.
A lot of market movers this week!
Of course, attention this week is mostly focused on the FOMC meeting, its interest rate decision, and subsequent press conference.
But there are a lot of GDP, employment, and PMI statistics that could spark volatility on the USD, EUR, CAD, NZD, JPY, and on the stock market, which could be fun!
Also this week, we have the OPEC meeting on Thursday. Brent oil is trading above 80 USD per barrel, disappointing President Trump, and if production cuts get confirmed, accompanied by reassuring statements and full support from OPEC members, prices are likely to remain at that level or beyond. On the contrary, a lack of cohesion would cause a drop that could close the gap and push the price below 78.
Here is the chart:
There’s a series of price tops here, and if they really want to keep oil prices at these levels, OPEC will have to be very convincing in its statement!
Have a great trading week!