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US stock markets rebound to test important technical levels on possible trade deal with China and positive corporate earnings

As we expected and shared with you in our weekly update last week, the US stock market rebounded and ended the week in positive territory.

The DJIA closed on Friday at 25,271; up 2.4% from last week’s close, as did the S&P500 (+2.4% at 2,723). The NASDAQ closed at 7,357 (+2.6%).

The jobs report published on Friday showed, once again, the strength of the US economy, which created 250k jobs, beating estimates and confirming the unemployment rate at 3.7%: an outstanding performance indeed.

Moreover, we were helped by a strong rise in wages - which has been sluggish despite low unemployment - with average hourly earnings jumping 3.2%.

October was a challenging month for stock investors (at least those investing in long-only portfolios); the worst since 2011. We are 7.5% below the all-time highs marked earlier this year and volatility, as we have remarked many times, is here to stay and is there for us to take advantage of.

Let’s have a look at the S&P500:

The bounce off the lows materialised as expected and the divergence on the indicators was confirmed, at least in the short term. The upward movement extended to once again touch the 200-day SMA, taking out our stop profit and setting our position flat on this index.

The 200-day simple moving average rejected the pullback and prices are now testing the dynamic support they regained last week. The situation is not clear at the moment and a short should only be opened if prices drop below 2,690 again.

I would still be wary of opening long positions as the SMA has clearly flattened.

As we are heading towards the end of the year and pressure to end the year on a positive note will raise for institutional investors, we should analyse the situation from an intermarket perspective, taking into consideration what is happening on an asset that is considered a safe haven, and pushes higher when investors are seeking to reduce their risk on the stock market: gold.

Gold seems to have abandoned the medium-term bearish mood, confirming the series of divergences on the indicators breaking through the two dynamic resistances and the horizontal resistance area.

Such movement, aside from technical considerations, seems to be supported by fundamental factors, such as the surge in buying activity of countries like Russia, which are aiming to stockpile value and render their trade less dependent on the dollar system.

All things considered, we are in a flat position as the market itself is signalling uncertainty. Just look at the doji candle with large shadows marked on Friday at market close, which is signalling that investors and traders might not be convinced of the strength of the rebound and cashed in the gains on the long position opened at the opening of the weekly trading session, and another doji that seems to be forming at the time of writing.

Therefore, I still see some bearish pressure here (there is also a bearish Head & Shoulders model forming on the H1 chart) and see 2,690 as a trigger to open a short position.

I would consider a long position with a conservative position size only if prices rise convincingly above 2,780.

As for gold, we missed the train here, but we are ready to jump in as soon as it (hopefully) corrects to test the dynamic support.

The same considerations regarding the bearish mood apply to NASDAQ:

The rebound also materialised here, although it was a bit more painful for us as we chose not to move the stop loss to the breakeven point after we took profit on half of the position at 6,757 to give our short some breathing space. So our stop was triggered at 7,084.

That was a pity, as the index tested the 50% retracement and started declining sharply again.

What we might consider is re-entering the short position should the index continue to decline and move below the dynamic support it is testing right now, while keeping an eye the RSI for a break below the divergence line.

We will keep you posted on twitter.

Unlike with US stocks, we are still in the game with DAX, with our half short position in place and the wide Head & Shoulders looming on this index:

As prices did not drop below the lows from Friday the 26th, we kept the stop at 12,200 and we did not move it to 12,000. It seems like the rebound, after successfully closing the gap on the chart, is starting to fade away. We will be ready to follow up and trail our stop as the movement hopefully continues.

EURUSD. As we tweeted in real time on the 31st of October, as the cross was approaching the support, we closed the short at 1.1325 and set the stop to breakeven:

That was a wise move as the cross rebounded and took our BE. The situation is as follows:

A double bottom seems to be forming, and would justify a long above the dynamic resistance, confirmed by a break out of the resistance area. Short below the lows.

Our short is still well alive on Brent oil as well, where we trimmed off another half of the position on the 2nd of November at 72.85 and lowered the stop to 75.83 (tweeted again in real time).

Here is how the chart looks now:

We have this strong downward movement which has reached the target of the bearish Head & Shoulders model and has reached the resistance area. The rebound from there is ongoing, but we’re still holding on to our trailing stop as we have already trimmed our position twice and have room to breathe. If the stock markets resume their bad mood, this position will bring us more profits.

That is all for this week. Stay tuned on our social media channels and watch out for the interest rate decisions and related statement/press conferences in Australia, New Zealand and the of course US on Thursday. The GDP and related data announcement could bring some volatility to GBP and the FTSE on Friday.

Have a great trading week!

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