SP500 at Key Daily Support – Break It or Make It

Fundamental analysis

The U.S. is actually moving pretty close to having most Covid restrictions lifted across the country on businesses like restaurants, amusement parks, theaters, museums, music venues, etc.

There are social gathering capacity limits in some states and cities still, but those are mostly scheduled to phase out by this summer, assuming no major setbacks in getting and keeping the virus under control.

Data yesterday showed the ISM Manufacturing Index unexpectedly slid in April though the gauge remained in expansion territory for the 11th month in a row. The read of 60.7% is considered very healthy but the slowdown reveals underlying struggles to meet demand.

The supply-demand imbalance pushed the backlog of orders component to a record-high while customer inventories plunged to an all-time low. The Prices component jumped to its highest level since 2008 with all 18 industries reporting they paid higher prices for raw materials for the fourth straight month. This reflects two main competing narratives on Wall Street right now.

Bullish vs bearish expectations

Bulls believe pent-up consumer demand, underpinned by generous fiscal and monetary supports, will usher in an economic boom not experienced in a generation, which will pull corporate profits up along with it.

Bears, on the other hand, believe higher prices will continue building and eventually put a dent in the rosy expectations for growth. Federal Reserve officials continue to make the case that the current inflation trends are transitory and will ease as supply chain kinks get ironed out.

Many Wall street bears argue that higher prices will be more sticky than anticipated, particularly those that are already being passed on to consumers. Today brings both the Trade Balance Report and Factory Orders for March.

First quarter earnings also continue to flow with Pfizer among today’s highlights. Pfizer’s vaccine, developed with BioNTech, is one of the three authorized for use in the U.S. Along with Moderna,

Pfizer stands apart from rival vaccine makers Johnson & Johnson and AstraZeneca because they are selling their Covid-19 vaccines for profit. Pfizer reports before markets open. Today I am closely watching Zillow, Activision Blizzard, Corteva, CVS, Ferrari, Marathon, and Virgin Galactic.

Technical analysis

I have mentioned swing setup in my weekly outlook. So, today I want to focus on intraday levels. SP500 is approaching key Gann level at 4160. If price sustains below, expect to see a sell-off. On the other hand, 4225 is a bullish breakout level. It seems not easy to get there.

Neutral zone 4225 – 41160. Middle-strength level within this area – 4129.5, weak levels – 4209 and 4176.5. In case of bearish breakout, look for 4128, 4096 (middle-strength levels) and 4144, 4112, 4180 (weak levels).

For a look at all of today’s economic events, check out our economic calendar.

Why I’m Not Worried About Higher Capital Gains Taxes

Fact: Einstein didn’t fail math.

Quote: We don’t pay taxes. Only the little people pay taxes. – Leona Helmsley

But wait- there’s more:

  • George Washington never had wooden teeth. His dentures were made of gold and ivory which browned, appearing like wood.
  • According to physicists, a penny dropped form the Empire State Building is too flat or small to reach enough momentum to kill anyone.
  • Napoleon wasn’t short- he was 5’5” which was average height at the time. British cartoonist James Gillray drew caricatures depicting him as small. It stuck.

I could go on and on… “truth” is often myth because once crowd-think gets going, it’s hard to stop it, even if untrue.

I’m telling you this because there are market bears out there. This is inherently good because without bears, bulls couldn’t make money. And when everyone’s a bull, then it’s probably time to be a bear. But most of the time bears just add a grumpy downward resistance on stock prices for bulls to fight against. So generally, there’s no shortage of fearmongering in the stock market.

The latest scare for stocks is two-fold:

  1. President Biden will jack up taxes and kill the economy.
  2. The sky-high P/E ratio of the S&P 500 virtually ensures an imminent melt-down.

I’ll dig into these and tell you why I’m not scared. I prefer to see cute little teddy bears, not rabid snarling claws-out beasts.

Let’s get to it.

TAXES

No one is dying for higher taxes, certainly not me. But let’s assume the unlikely worst: Biden’s tax proposal passes without obstacle. The first instinct is to think it’s cataclysmic for stocks. But would it be?

Looking back since the 1950s, tax hikes may not actually pose significant hurdles to investors after all.

When we hear higher taxes, we think sinking stocks. But that’s like a short Napoleon. Fact is, for 70+ years, stocks showed better than average returns when tax increases hit. Naturally, other economic factors helped influence market action, but stocks went up when taxes rose.

There are corporate, personal, and capital gains taxes. Only 10% of the last 70 years were their significant increases: all three going up in 1993. Both personal and capital gains taxes went up in 2013.

In 2018, markets cheered as the Trump administration slashed top corporate taxes to 21% and top personal taxes to 37%. The long-term capital gains rate is now 20%. If Congress does nothing, these tax rates will end in 2026 and rates would return to the top rates of:

  • 35% for corporate taxes
  • 39.6% for personal taxes
  • still 20% for long-term capital gains.

Biden is essentially proposing the changes take effect sooner. They are really aimed at those who earn more than $400k a year. The reality is this mainly affects the wealthy and for most people, it doesn’t even matter. But if you’re reading this, there’s a fair chance it would affect you. For instance, if you live in Manhattan, your top rate could go to 58%: 39.6 cap rate + 3.8 health care + 3.8 NYC tax + 11 state = 58%.

Yuck.

But let’s just say these taxes do go into effect. It turns out stocks actually reacted opposite to how you might think. Since 1950, taxes went up 13 times. During that time, the S&P 500 posted above-average returns according to research done by Fidelity sector strategist, Denise Chisholm. She pointed out that the year before and during a tax increase, all but one time, stocks rose. They went up 100% of the time corporate taxes were raised:

Source: Haver/FMR

This also extended down to individual sectors. She said that the Discretionary sector counterintuitively did better during tax increase periods. Her research also showed bonds also did the opposite of what was expected. Instead of attracting capital, bonds actually floundered during the same periods.

Here’s the likely reality: President Biden needs to come to the table with more than he expects getting done: negotiation 101. In the words of Louis Navellier: “Democrats need to win the mid-term elections next year. They can’t do that if Biden wrecks the economy. He needs to push a lot and walk away with some compromise.”

Essentially: this is all optics. The truth is, it is entirely unclear if Biden’s campaign tax talk will ever make it into law.

HIGH P/E

P/Es are really high. The S&P 500’s P/E ratio is 42.57:

Source: Multipl.com

For those preoccupied with it, that’s worrisome.

But here’s the deal: earnings are rising- fast. With price divided by earnings, a larger denominator means a shrinking P/E. Earnings are rising to meet price, not prices falling to meet earnings. According to FactSet, 60% of the S&P 500 reported Q1 results so far. Of those, 86% beat EPS estimates. If trends continue, that will be the highest since FactSet started tracking in 2008. In aggregate, earnings are 22.8% above estimates.

Source: FactSet

BIG MONEY

Despite a choppy market last week, Big Money data is on the rise. The Big Money Index just ripped to 77.4%:

Source: Mapsignals.com

And buying was focused in Real Estate, Materials, Industrials, Financials, and Discretionary:

Source: MAPsignals

This is not bearish people:

  • A rising Big Money Index
  • Buying in infrastructure and reopen sectors
  • Virtually no selling to speak of

Before we get carried away by talk of taxes taking us off a cliff, it pays to know the facts. Most of us don’t want taxes, but most of us don’t know that historically it’s not a big deal. And the hard truth is, if the wealthy will get taxed, they are the ones who can pay to minimize the effect. Loopholes and tax strategies are rarely employed by the middle and lower class. That’s because good accounting is expensive. And that’s the rub: taxes aimed at levelling the playing field likely won’t: “We don’t pay taxes. Only the little people pay taxes.” – Leona Helmsley

To learn more about MAPsignals’ Big Money Index please visit.

Disclosure: the author holds no positions in SPY at the time of publication.

Investment Research Disclaimer

Will Earnings Season Bring Volatility To The Stock Market?

The Commerce Department last week reported that the U.S. economy grew at a +6.4% annual rate in the first quarter, slightly below estimates but still strong. If it would have come in real hot and much higher bears would have pointed to fanning the inflation flames even further.

This mindset of “bad-news-could-be-good-news” is helping to keep the stock market at or near all-time highs. If economic data somewhat disappoints it means the Fed stay dovish and accommodative for longer.

Fundamental analysis

That might be important to keep in mind as April data starting this week is expected to be extremely good. The April Employment Report is due next Friday and with upper-end of Wall Street estimates look for upwards of +1 million new jobs being added. Other key April data next week includes the ISM Manufacturing Index on Monday, and the ISM Non-Manufacturing Index on Wednesday.

employment

If the data comes in better than expected the bears will win the nearby battle and have the upper hand when talking higher inflation and the Fed perhaps tightening sooner than anticipated. So this week could be a bit tricky whereas “disappointing-data” could actually be digested as a win for the bulls and “strong data” a win for the bears.

The earnings calendar is packed again next week with big names including Activision Blizzard, Adidas, AllState, Cerner, Cigna, CVS, Dominion Energy, Enbridge, Etsy, Hilton Worldwide, Moderna, Monster Beverage, Nintendo, PayPal, Peloton, Pfizer, Rocket Companies, Square, TMobile, Wayfair, and Zoetis.

COVID-19

Checking in on U.S. progress against Covid-19, the number of adults that have received at least one dose is around 60%-65%, depending on the source. Global cases continue to rise led by India, where new infections have been hitting new record highs every day for weeks now. The country reported a staggering 380k new infections and 3,645 new deaths on Thursday while less than 10% of the population has been vaccinated.

Bottom line, the global restart will not be synchronized like many bulls had hoped would be the case and global growth may continue to struggle. At the moment the U.S. market doesn’t seem to care. It will be interesting to see if increasing inflation and continued global headwinds will eventually come home to roost.

SP500 technical analysis

SP500 earnings season

Earnings season can bring volatility to the stock market. At the beginning of May, cycles turn to the downside. Note, this is only a timing tool and it never shows the amplitude or strength of the move. When cycles are topping, it means we can expect a move down or choppy trading. This is it.

But relying on cycles only is not a good idea. Insider Accumulation Index shows bearish divergence on a daily chart. At the same time, Advanced Decline Line is still strong. The key resistance is around 4250 at the moment. I believe earning season can bring a profit booking to the stock market. If that happens, watch 4000 – 39500. It was a massive resistance and now it might turn into support. Intermarket Forecast is neutral. But if it turns to the downside, we will finally see a pullback in SP500.

For a look at all of today’s economic events, check out our economic calendar.

How Might Markets React to Georgia Senate Runoffs?

The S&P 500 posted a 1.5 percent drop while the Dow Jones shed 1.25 percent on Monday, which was their biggest single-day decline respectively since the week before the November US elections. The S&P 500 experienced its worst start to the year since 2016, as investors battled with persistent pandemic woes amidst rising global coronavirus infections that exceeded 85 million. The US posted a record high for daily cases while the UK reimposed a nationwide lockdown until February 15.

Still, at the time of writing, US equity futures are edging higher, potentially setting up yet another episode of turnaround Tuesday.

Also, investors have to contend with looming US political risks once more, with Georgia on their mind.

And unlike the languid pace of the timeless tune, Georgia On My Mind (first recorded in 1930 by Hoagy Carmichael before being propelled to global fame by Ray Charles in the 1960s), the events out of the state later today has the potential to jolt markets once more.

Why are the Georgia Senate elections important?

The November race for these two Senate seats did not produce a clear winner. Hence, today’s runoffs aim to settle the score. It’s a high-stakes contest, as the results from ‘take two’ of this race could determine whether Democrats will have enough political mass to push their agenda through over the next two years.

As things stand, the Senate makeup currently tilts towards Republicans 52 to 48. Should Democrats win the two seats that are up for grabs, that would make it an evenly-split 50 seats each for Republicans and Democrats. However, that would then set up incoming Vice-President Kamala Harris with the tie-breaking vote, enabling her to force through the will of the Democrats, and that of President-elect Joe Biden.

How might stocks respond to the results?

This is a tricky one.

A “blue wave” scenario could still materialize, with Democrats having ultimate sway in Washington DC. Such a unified government could well push through larger rounds of fiscal stimulus in the near-term, which is a positive for US equities.

However, investors would also be cognisant of other policies that are typically associated with Democratic lawmakers, such as tax hikes or heightened regulations. And such measures may serve as potential dampeners on stock prices.

In the immediate aftermath of the November polls, US stock markets had clearly revelled at the thought of a gridlocked government, with the S&P 500 climbing 11.8 percent since the eve of the presidential election. Investors will now have to navigate these political uncertainties in ascertaining whether benchmark indices should be pushed to new record highs as a result of Tuesday’s Senate runoffs.

How soon will we know the results?

Keep in mind that the outcome of today’s polls could take days to be declared as was the case for the November elections, which took the state 10 days before officially declaring the results. On top of that, the voting outcome could still face legal challenges thereafter as well. Hence, US markets could be blanketed with a layer of political uncertainty until the official results are known.

Dollar likely not spared

Besides stock benchmarks, investors’ initial reactions to the Georgia Senate runoffs may also be manifested in the Dollar index (DXY). Ramped up expectations for the so-called “blue wave” may heap more downward pressure on the Greenback on hopes that incoming fiscal stimulus may face less political resistance and potentially boost US inflationary pressures, thus eroding the Dollar’s appeal. However, should Republicans be seen as having the advantage in this latest political contest, that may offer support for the beleaguered Dollar, and push the DXY back above the psychologically-important 90 mark.

And with Georgia on many an investor’s mind, perhaps the pandemic woes can be put on the back burner, at least for a while.

Written on 05/01/2021 08:00 GMT by Han Tan, Market Analyst at FXTM

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S&P Global in Advanced Talks to Acquire London-based IHS Markit for $44 Billion

S&P Global Inc, a leading provider of independent ratings, benchmarks, analytics and data to markets worldwide, is in advanced talks to acquire IHS Markit, a financial information services company, for nearly $44 billion, according to the Wall Street Journal.

This deal for IHS would be the largest of the year globally, according to Dealogic data, topping both chipmaker Nvidia Corp’s about $40 billion deal to buy chip designer Arm Holdings and nearly $40 billion deal between Nippon Telegraph & Telephone Corp. and a subsidiary, reported by the WSJ.

S&P Global’s shares closed 1.0 4% higher at $341.57 on Friday; the stock is up about 25% so far this year.

S&P Global Stock Price Forecast

Nine equity analysts forecast the average price in 12 months at $397.25 with a high forecast of $422.00 and a low forecast of $353.00. The average price target represents a 16.30% increase from the last price of $341.57. From those nine analysts, seven rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $411 with a high of $629 under a bull-case scenario and $242 under the worst-case scenario. The firm currently has an “Overweight” rating on the ratings company’s stock.

Several other analysts have also upgraded their stock outlook. UBS raised the price target to $424 from $422. BMO lowered their stock price forecast to $375 from $392. Credit Suisse increased their target price to $405 from $400. Stifel upped the target price to $353 from $351 and Oppenheimer raised the price objective to $399 from $396.

Analyst Comments

“S&P Global’s collection of businesses include a top two ratings agency, a leading index franchise, a market data platform, and a leading commodity pricing provider. It has a wide moat, strong market share, and high margins,” said Toni Kaplan, equity analyst at Morgan Stanley.

“We expect SPGI’s pricing power, the potential for product innovation, global expansion, commercial transformation, and cross-enterprise opportunities will drive an 11% EPS CAGR through 2024 with potential upside from China, Kensho, and ESG,” Kaplan added.

Upside and Downside Risks

Risks to Upside: Better-than-expected debt issuance due to rapid economic recovery. Counter-cyclicality of non-transaction revenue and ERS business could offset weaker issuance. Higher-than-expected synergies from BvD acquisition – highlighted by Morgan Stanley.

Risks to Downside: Greater-than-expected issuance decline due to credit-led recession. Additional industry regulation. Increased share loss to smaller rating agencies in both structured and corporate.

Darkest Before Dawn

The MSCI Asia Pacific Index fell for the fourth consecutive session today and many markets (India, Shenzhen, Taiwan, and Korea) fell more than 2% and most others were off more than 1%. Europe’s Dow Jones Stoxx 600 is giving back the past two days’ gains. The S&P 500 could gap lower at the open. Benchmark 10-year yields are a little softer but have remained subdued in the face of the dramatic moves in equities.

The US yield is little changed near 0.66%. Practically no currency could escape the clutches of the rebounding dollar, though the yen and sterling are little changed. The JP Morgan Emerging Market Currency Index is lower for the fifth consecutive session. Gold remains heavy and is approaching the (38.2%) retracement of this year’s rally which is found near $1837. Crude oil is consolidating at lower levels. November WTI is in narrow range below $40 a barrel.

Asia Pacific

Hong Kong and New Zealand report trade figures. Economists did a good job forecasting New Zealand imports and exports. As expected, the formers rose a little and the latter slipped. The takeaway is that New Zealand reported its first trade deficit (~NZD353 mln), snapping a six-month period of trade surpluses. Economists had a harder time with HK figures. Exports pared their decline to 2.3% year-over-year from 3%, but the bigger miss was in the weakness of imports. These fell 5.7% year-over-year after a 3.4% decline in July. The net result was that HK’s trade surplus was halved from the HKD29.8 bln to HKD14.6 bln.

China continues to harass Taiwan with incursions into its air defense zone. The bullying practice has escalated in the past week or so. Beijing’s aggressiveness comes as the US some European countries have stepped up their interactions, including high-level visits. It is hard to say that it is having an economic impact but as a potential flashpoint, it is drawing attention.

Japan may have a new prime minister, but the government’s assessment of the economy remained little changed from last month. The economy is said to be in a severe place but some areas, namely, exports, production, business failures, and jobs, are improving (four of 14 categories). The median forecast in the Bloomberg survey expects the economy to expand 15% this quarter, the first expansion since Q3 19.

The dollar is in less than a third of a yen range today above JPY105.20. The $1.4 bln in expiring options between JPY105.10 and JPY105.25 have been neutralized. The next set is for almost the same amount at JPY105.70-JPY105.75. A four-day uptrend on the hourly bar charts comes in a little above JPY105.20 by the North American open. A break could see JPY104.60-JPY104.80. The Australian dollar is lower for the fifth consecutive session. It dipped below $0.7030 for the first in two months. A break of $0.7000 could see $0.6950 quickly.

The $0.7080 area now offer resistance. The PBOC set the dollar’s reference rate a little softer than the bank models in the Bloomberg survey anticipated. Although some observers see it as a sign that officials are seeking to stop the yuan from strengthening, the fact of the matter is that the dollar remained bid. The greenback is at its best level since the start of last week, a little below CNY6.83. Note that after the US market close today, FTSE-Russell will announce whether it will include Chinese bonds in its indices. A year ago, it refused, but China has reduced barriers to enter and exit.

Europe

European banks took 174.5 bln euros from the ECB’s latest Targeted Long-Term Refinancing Operation. These are loans that can have a rate of as much as minus 100 bp providing the funds are lent to households and businesses. It was at the high end of expectations and follows a 1.3 trillion operation a few months ago. This will lead to another jump in the ECB’s balance sheet. Recall that the ECB’s balance sheet has been slowing increasing as it continues to buy bonds under its APP and PEPP operations. The extra liquidity in the Eurosystem is a factor that is pushing three-month Euribor a little below the minus 50 bp deposit rates. When observers say that central banks are out of ammo, few anticipated the deeply negative loans offered and the introduction of the dual rates.

Neither the Swiss National Bank nor Norway’s Norges Bank altered policy at today’s meetings. The pullback in the Swiss franc in recent weeks is too small to register for officials, who remain concerned about its strength. The OECD regards it as the most over-valued currency in its universe. The threat of being identified by the US as a “currency manipulator” is not a strong enough deterrent as intervention remains one of its key tools. Some had expected the Norges Bank to bring forward its first hike from the end of 2022, but it did not. On the other hand, Hungary raised the one-week deposit rate 15 bp to 75 bp, catching the market by surprise and giving the forint a lift.

The German September IFO survey edged higher. The current assessment rose to 89.2 from 87.9, while the expectations component firmed to 97.7 from a revised 97.2 (from 97.5 initially). The overall assessment of the business climate rose to 93.4 from 92.6. The preliminary PMI data showed the manufacturing sector continues to rebound, while the service sector is stalled.

In the UK, Chancellor Sunak canceled the fall budget and is expected to present a new jobs support program to Parliament today. Speculation in the press is for a German-like arrangement, where the government picks up some of the wage bill for employees that are retained but on shorter hours. Meanwhile, the British Chamber of Commerce estimate suggest over half of UK firms have not completed the government’s recommended steps to prepare for the end of the standstill agreement with the EU.

The euro is extending its decline for a fifth consecutive session. It has dipped below $1.1635 in European turnover. For the first time this quarter, the skew in the one- and two-month options (risk-reversals) favor euro puts over calls. The $1.16 area corresponds to a (50%) retracement of the Q3 gains. The $1.1600-$1.1610 area holds about 1.6 bln euro in options that expire today.

There is another option for nearly 525 mln euro at $1.1625 that also will be cut today. A move above $1.17, where an 845 mln option is struck (expiring today) would help stabilize the tone. Sterling is firm within yesterday’s range, when it tested $1.2675. It is near $1.2750 in late London morning turnover. A push above $1.28 is needed to begin repairing some of the recent technical damage.

America

The US reports new home sale (August) and the KC Fed manufacturing survey (September), but it will be the weekly jobless claims that capture the attention. Seasonal factors encourage expectations for a continued gradual decline. However, note that around in November, the seasonal adjustment will add rather than subtract. The markets will be particularly sensitive to an unexpected increase in weekly jobless claims, especially given the lack of fresh measures by either the Fed or Congress. In fact, some observers attribute the Fed’s somber assessment to prompt more stimulus as a factor that helped spur the down move in equities.

Canadian Prime Minister Trudeau unveiled funding for a wide range of initiatives, including daycare, pharma, housing and environment. None of the three major opposition parties endorsed it. Trudeau leads a minority government and the budget needs to be approved or it could potentially trigger new elections.

Mexico’s central bank meets today. Yesterday’s retail sales report showed a solid 5.5% increase in July, but it was still less than expected. Inflation is running just north of the upper end of Banxico’s 2-4% target. The cash rate target is 4.5%. The peso’s six-week rally is ending with a bang this week and it is off over 5%. After five 50 bp rate cuts, Banxico is widely expected to cut 25 bp today. We suspect the odds of standing pat is greater.

The US dollar poked above CAD1.34 today for the first time since early August. The next important chart area is near CAD1.3440. Initial support is likely around CAD1.3360. If the equity market stabilize the Canadian dollar will likely strengthen. After jumping over 3% yesterday, the greenback extended its gains to MXN22.53 in Asian turnover but has gradually firmed through the European morning. The first area of support is seen in the MXN22.00-MXN22.20 area.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Dollar’s Bounce: Nearly Over?

Sterling’s weakness is a phenomenon of its own making. US-China tensions continue to run high as Washington has ratcheted up pressure on China and is insisting on the September 15 deadline for TikTok to change ownership or be banned. Beijing would rather see it shuttered than sold.

The high-flying US NASDAQ has pulled back from the record highs set at the start of the month by 10%, but bottom-picker have been met with overhead supply and profit-taking. Oil prices moved sharply lower for the second consecutive week. November Brent fell around 12%, and October WTI tumbled 14% over the past two weeks to levels not seen in three or four months.

Then there is the dynamic within the foreign exchange market itself. On September 1, the euro pushed above $1.20, sterling was approaching $1.35, and the Australian dollar poked above $0.7400. The greenback push below CAD1.30 for the first time since January. Comments by the ECB’s Lane about the role of the exchange rate as an input into its economic models and forecasts spurred a dollar short-squeeze rally.

We had anticipated that after the ECB meeting was out of the way, the market’s attention would turn to the FOMC meeting (September 15-16), where the outcome is likely to reinforce the dovish implications of adopting an average inflation target, around which there is extensive “strategic ambiguity.” Below we fine-tune this scenario.

Dollar Index

With a couple of minor even if notable exceptions, the Dollar Index has been confined to a 92.00-94.00 trading range since late July. It has been trending broadly sideways. It traded at its highest level in nearly a month in the middle of last week near 93.65, just above the upper Bollinger Band for the first time in several months.

The MACDs are trending higher, and the Slow Stochastic is just below overbought territory. The 92.70 level seen around last week’s ECB meeting corresponds to a (50%) retracement of the rally from September 1. A move above the 94.00 area would target 94.75-95.50.

Euro

The euro snapped a six-day slide in the middle of last week, a day before the ECB meeting. It will begin the new week with a three-day advance in tow. Lagarde’s effort to downplay the euro’s strength saw the market bid it a few ticks through the (61.8%) retracement objective of the slide that began after it poked above $1.20 on September 1. Both the MACD and Slow Stochastics have nearly completely unwound the stretched condition and appear poised to turn higher in the coming days. We continue to believe the break from this range takes place to the upside, but the range affair can persist a bit longer.

Japanese Yen

The dollar has been in an exceptionally narrow trading range against the Japanese yen. The nearly 60 pip range was among the smallest weekly ranges of the year. It did not stray more than 30 pips in either direction of JPY106.10. For the third consecutive week, the dollar recorded lower highs and higher lows. The momentum indicators do not appear helpful. More broadly, the dollar is hovering around the middle of a JPY105 to JPY107 trading range.

Britsh Pound

Sterling was pounded last week. It was marked down by almost 3.7%, the most in six months. Part of it was dollar strength. After all, the greenback strengthened against most of the major currencies. However, the real driver was reneging on the Withdrawal Agreement that is seen as making a disorderly exit from the standstill agreement more likely.

The Bank of England meets next week, and some groundwork for additional easing as early as November seems reasonable to expect. Sterling was pushing toward $1.35 on September 1 and made a low ahead of the weekend just below $1.2765. The 200-day moving average is near $1.2735, and the (61.8%) retracement of the rally since the end of June is about $1.2710. The (38.2%) retracement of the rally since the March low is a little below $1.2700. The next important retracement (50%) is closer to $1.2455. Initial resistance now is likely around $1.2950.

Canadian Dollar

The US dollar rose in four of last week’s five sessions to snap an eight-week slide against the Canadian dollar. It was only the second weekly advance here in Q3. The bounce faded in the middle of the week near CAD1.3260, a few ticks ahead of the (38.2%) retracement of the decline since the end of June. The next retracement objective (50%) is around CAD1.3320. The five-day moving average has crossed above the 20-day for the first time since July, and the momentum indicators are trending higher. A loss of CAD1.3100 would confirm the correction is over.

Australian Dollar

The pullback from the high above $0.7400 on (September 1) stopped at the (38.2%) retracement of the leg up from the end of June found near $0.7190. Initial support is now pegged around $0.7240. The MACD is still headed lower, but the Slow Stochastic appears to be bottoming. A move above last week’s high near $0.7330 would likely confirm the correction is over, and another run higher has begun.

Mexican Peso

The greenback’s slide was extended for the fifth consecutive week against the Mexican peso. In an outside down day on Wednesday, the dollar was pushed below the 200-day moving average (~MXN21.59) for the first time since before the pandemic. It has not been able to resurface above it. The next big target is MXN21.00. The momentum indicators are not helpful here, but it has been fraying the lower Bollinger Band (~MXN21.30). A modest bounce just to the 20-day moving average (~MXN21.82), the middle of the Bollinger Band, would be a large move of a couple percentage points.

Chinese Yuan

The greenback’s downtrend against the redback has now extended for the seventh consecutive week. It has risen in only one week so far in Q3. Since the end of June, the dollar has fallen by about 3.5% against the yuan. Given that it is so highly managed, one must conclude that officials see the modest strength as desirable.

Some benefits cheaper imports from the US may attract international capital, as market-liberalization measures, some of which are part of the US-China trade agreement, are implemented. It is difficult to know how far officials will allow things to go, but a near-term trading range between roughly CNY6.81 to CNY6.86 may be emerging.

Gold

The lower end of the recent trading range around $1900 was successfully tested last Tuesday, and the precious metal recovered to almost $1967 before consolidating ahead of the weekend. The MACD and Slow Stochastic appear poised to turn higher. While a gain above $1970 will appear constructive, gold has not been above $2000 for a month now.

Oil

October WTI fell for the second week for the first time since April. However, in recent sessions, a shelf has been carved in the $36.00-$36.60 area, and the Slow Stochastic appears set to turn higher. That area also corresponds to a (38.2%) retracement of the rally since those April lows. The next retracement target (50%) is around $33.50. It managed to finish the week above the lower Bollinger Band (~$37.05). The $39-$40 area may offer a formidable cap.

US Rates

Both the core PPI and CPI readings were above consensus forecasts, but it did not prevent the 10-year yield from falling five basis points last week to about 66 bp. In early August, the yield spent a few days south of 60 bp, but since the middle of June, it has mostly held above it. At the same time, it has not been above 80 bp either, which is well below the current rate of CPI (1.3% and 1.7%, for the headline and core, respectively).

The Treasury re-opens previously sold 20-year bonds and 10-year TIPS in next week’s auction. The 2-10-year yield curve eased to about 54 bp by the end of the week, which captures primarily the softer 10-year yield. The curve is at its 20-day average. The market anticipates a dovish Fed, noting downside risks and the lack of fiscal stimulus.

S&P 500

An outside down day on Thursday saw follow-through selling ahead of the weekend that took the S&P 500 to a new low since the record high on September 2. The benchmark bounced back after approaching 3300. It closed slightly higher ahead of the weekend, but not higher than it opened. The momentum indicators are still pointing lower.

The 3277 area houses the (38.2%) retracement of the gains since the mid-June low. Pushing through, there could signal another 2% decline. A move back above 3420 would stabilize the technical tone. A rally to new record highs was beyond the imagination in the dark days of March, and many have doubted it ever since–the gap between Wall Street and Main Street makes it unsustainable.

The question is whether this pullback marks the end of the rally, or is it a correction? While we still see it as most likely a correction, it does not mean that a bottom is in place.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Bye-Bye “Hot Money”, Hello “Real Money”?

The Nasdaq 100’s 4.77 percent drop on Tuesday officially brings the index into a technical correction, having tumbled by over 10 percent from its record high and now testing its 50-day moving average as a support level.

The worst of the selloff though may be over, with Nasdaq futures slightly higher at the time of writing. Also note that the VIX index, also known as the fear index, has come off the 3-month high it posted last week, though still relatively elevated above the 30 psychological level and higher than its long-term average of around 20.

Prior to the recent selloff, the Nasdaq 100 was coming off the back of its fastest run this century, having doubled in the space of 20 months and crossing above the 12,000 psychological level. Much had been made about valuations reaching nose-bleed heights and pricing in perfection, while the index’s 14-day relative strength index ventured seemingly without a care deep into overbought territory.

Investors are now being made to reckon with those warning signs, as Big Tech leads this recent selloff that has wiped out trillions in overall market value. Having basked in the market’s scorching run over the summer months, a period in which multiple asset classes including stocks, gold, and even oil posted double-digit gains, investors are perhaps bracing for the chilly months ahead.

After all, the global economy is still reeling from the effects of the pandemic, with a vaccine yet to be ready for mass roll-out. The delay in the next round of US fiscal stimulus is also testing investors’ patience, while the November US elections could inject even more doses of uncertainty into global markets.

Recent media reports about Softbank Group making massive bets on tech stocks via the options market added to the narrative that equities were being fuelled by speculation, and a lot less by fundamentals. There were enough signs that a healthy pullback to more sustainable levels for tech counters was in order.

Yet the fundamentals appear to point to a supportive environment for tech counters. The social-distancing measures around the world is set to leave societies ever more reliant on tech offerings, with their business models suited for such an environment. Markets are also awash with unprecedented fiscal and monetary stimulus, while near-zero US interest rates should buffer the appeal of equities.

For proper context, even after the startling decline, the Nasdaq remains 58 percent higher and the S&P 500 is still up by 49 percent from their March troughs, and the price-to-earnings ratios for these indices remain well above their respective long-term averages. Despite such indicators suggest that there remains a fair bit of hot air that could be let out of the overly-inflated tech sector, investors may be faced with scarce alternatives in chasing returns.

Still, it remains to be seen how much of a drop would be enough to entice “real money” investors back into US equities. Perhaps long-term investors are just waiting for the dust to settle before buying the dip.

Written on 09/09/20 08:00 GMT by Han Tan, Market Analyst at FXTM

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About that Dollar Bounce

The price action lends credence to our view that a technical consolidative/corrective phase is at hand. Further near-term dollar recovery looks likely but does not change our longer-term bearish outlook.

Dollar Index

A bottom was carved and tested near 92.50. It is potentially a double bottom. A move above 94.00 is needed to confirm it, though others might not be convinced until 94.50 area (20-day moving average) is surpassed. The measuring objective of the double bottom is around 95.50, and the 95.80 is a retracement objective. The MACD appears poised to turn higher while the Slow Stochastic bottomed late last month, setting up a modest bullish divergence.

Euro

A potential double top is in the euro. It checked the air above $1.19 at the end of July and made a fractional new high in recent days. In between, it had fallen a little through $1.1700. That is the neckline of the double top and implies a measuring objective of near $1.15. We had offered a $1.1650 target last week. The 20-day moving average (~$1.1630) and the halfway mark of the rally off last month’s low ($1.1640) are near there as well. The next retracement (61.8%) is found closer to $1.1550. The MACD and Slow Stochastic are rolling over. Note too that implied vol rose along with the euro, and as the single currency corrects lower, vol will likely ease. The chart here since 2008 illustrates the importance of the area euro has approached. The fate of the 12-year downtrend is at stake.

Japanese Yen

The dollar posted its first leg up against the yen in dramatic fashion, with a key reversal from JPY104 on July 31. Follow-through buying lifted it to nearly JPY106.50 at the start of last week. There were a few days on consolidation, and the next leg up appears to have begun before the weekend. We suspect it can rise into the JPY107.00-JPY107.50. The 200-day moving average lies a little above the JPY108, around the upper end of its previous range. The Slow Stochastic turned higher at the end of July. The MACD is also edging higher.

British Pound

A double top also may be in place for sterling. The pound reached a high on the last day of July near $1.3170, and on August 6, a little above $1.3185. In between, it slipped to around $1.2980. The break confirms the pattern with a measuring objective of the $1.2780 area. The 20-day moving average and the 50% retracement of the last leg up of sterling that began near $1.1520 on July 20 also comes in near there. The next retracement (61.8%) comes in a little below the double top objective (~$1.2770). The momentum indicators are just begun rolling over.

Canadian Dollar

The US dollar fell to six-month lows against the Canadian dollar around CAD1.3230 in the middle of last week, but rebounded back to CAD1.3400 amid the wider greenback recovery ahead of the weekend. The 20-day moving average is found near CAD1.3435, and the high from late last month is a little higher (~CAD1.3460). A push there would signal a test on the CAD1.3500-CAD1.3530, and near the upper end of that range, the 200-day moving average is found. The momentum indicators are floundering in over-extended territory and have yet to convincingly curl up.

Australian Dollar

The potential topping pattern is not as aesthetically pleasing as the euro or sterling. It made a high at the end of July a little above $0.7225. It fell to about $0.7075 before rebounding and reached nearly $0.7245 before the pre-weekend cent sell-off. The greenback’s recovery saw the Aussie fall through and close below the previous day’s low, for a key reversal. A break of the $0.7075 area would confirm the topping pattern and project toward $0.6925. There are several areas of intermittent support. The $0.7040 area is the (50%) retracement of the rally that began in early July. The $0.7000 area is of modest psychological importance, and the next retracement (61.8%) objective is also there. The MACDs are not helpful now, and the Slow Stochastic has turned lower.

Mexican Peso

Emerging markets, for which the Mexican peso often serves as a proxy, seemed to turn lower against the dollar before the majors. Leaving aside the Turkish lira, where officials have finally appear to abandon their ill-conceived currency strategy, emerging market currencies remained under pressure, with the JP Morgan Emerging Market Currency Index falling for the second consecutive week.

Last week’s 1.5% decline is the largest decline in three and a half months. The dollar rose around 3.3% against the rand last week after gaining 2.4% in the prior week. Last week, the dollar’s nearly 4% gain against the Brazilian real was the most among emerging market currencies. The greenback looks poised may be range-bound between around MXN22.30 and MXN23.00. Our near-term bias is for a stronger dollar, but it closed softly ahead of the weekend.

Chinese Yuan

The yuan looks rich, given the dollar’s recovery ahead of the weekend and given the escalation and broadening tensions with the US. It traded at its best level since March (with the dollar at a low ~CNY6.9360). A trendline drawn off the late May high (~CNY7.1770) comes at the start of next week near CNY6.9860, but a move back to if not above CNY7.0 seems likely. Around 4.75% three-month implied vol is low compared with other currencies, but it is above its 200-day moving average (~4.4%). The skew in the options market (three-month risk-reversal) favoring dollar calls edged up slightly last week. While the skew is still low, it did increase more than the one-month tenor and could be picking up some risks around the US election.

Gold

New record highs were seen before the weekend near $2075.50, but then gold reversed lower and fell below the previous day’s low (~2034.55), though closed slightly above it. The bearish price action is intuitively consistent with the dollar’s bounce and the signal from the momentum indicators. The Slow Stochastic is poised to turn lower and did not confirm the new price high. The MACD is poised to cross down. Initial support is expected in the $1980-$2000 area. The rally has been so sharp that even a modest (38.2%) of the recent rally from early last month is closer to $1955.

Oil

The September WTI contract reached a five-month high (~$43.50) in the middle of last week, just shy of the 200-day moving average (~$43.80). This marked the end of a four-day net (close-to-close) rally of nearly 5.7%. Crude trade heavily in the second half of the week. It tested the upper end of a band of support that extends from around $39.80 to $41 before the weekend. The MACD has been trending lower since early/mid-June. The Slow Stochastic has actually turned up from mid-range. Still, our bias is lower.

US Rates

The US rates have found a near-term floor. The 2-year has held the 10 bp record low. Traders may have thought about pushing the 10-year yield below 50 bp, but have pulled back. The 30-year yield held 1.15% and recovered to almost 1.25%. There is some thought that with a weak dollar environment and near-record low-interest rates, some concessions may be needed to induce a robust reception to the US quarterly refunding. It is as if the inventory must be distributed to make room for new product.

The Treasury will raise $112 bln ($48 bln 3-year, $28 bln 10-year, and $26 bln 30-year) in coupon sales, which is about 16% more than the previous quarterly refunding. The Treasury has announced intentions to sell $132 more coupons in the August-October period than it did the last three months as it seeks to fund the huge gap between revenues and expenditures. One implication is that it would seem to boost the chances that the yield curve steepens. The 2-10 year curve briefly dipped below 40 bp last week, a low since late April. There is scope to claw back toward 50 bp in the coming weeks. The 2-30 year curve has been bouncing off 107 bp for two weeks. It can steepen toward 125 bp in the period ahead.

S&P 500

The benchmark gained almost 2.5% last week and filled the old breakaway gap from February (~3328.5). The S&P 500 gapped higher to start the week, and the gap takes on additional technical significance because it appears on the weekly and monthly charts as well. That gap, for reference, is roughly between 3272.20 and 3284.5. It then gapped higher on Wednesday, and that gap is unfilled as well (~3306.8-3317.4).

This area may offer initial support. The MACDs are not yielding any useful signal, while the Slow Stochastic turned up in the past week after barely correcting the over-extended reading. The S&P closed firmly, setting new highs were set for the week in the run-up to the close. There seem to be little in the way of a test on the record high set in February around 3393.5.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Trading Sniper: Three Best Setups on the Market Right Now

What counts in trading is the desirable risk to reward ratio and unfortunately buying Gold now does not have the risk/reward ratio that would thrill most traders. In addition to that, the risk of a very deep, bubble-bursting correction is quite significant. Instead of focusing on Gold, for FXEmpire viewers, we exclusively prepared three trading setups, worth looking at right here, right now.

The first one is SP500, which right now is below the crucial horizontal support on the 3235. That should have been a negative sign but I feel somehow optimistic about the future of this index. The reason why is the emerging inverse head and shoulders pattern. We are currently finishing the right shoulder and the neckline of this formation is…yes, you guessed right – 3235. Price closing a day above that resistance will be a buy signal.

A similar pattern can be spotted on DAX.  Here, we also do have an inverse head and shoulders pattern but on this German Index, it is additionally present on a combination of two crucial supports. The first one is the horizontal one on the 12800 and the second is the dynamic up trendline. As long as we stay above them, the sentiment is positive.

I will finish with the EURCHF, where I want to show You two of the best things in technical analysis. The first one is the power of the 38,2% Fibonacci and the second is the power of the false breakout. As You can see, EURCHF was testing the 38,2% many times and it was flawlessly defended as a support. This week, started with a bearish gap and a breakout.

The price reversed very sharply straight away, which left sellers only with the false breakout and losing positions. Once market participants established that the early breakout was fake, they started buying, which resulted in a bullish takeoff. The sentiment on EURCHF is definitely positive.

Tomasz Wisniewski, CEO Axiory Intelligence.

Twitter: https://twitter.com/wisniewskifx

Nasdaq 100 Analysis for 09/07/2020

There are two factors that we evaluate: price location and relative strength (not to be confused with RSI). Today, the NSX closed on it’s high and almost took out yesterday’s high as well. How much longer do you think the markets can run like this without a significant retrace? In terms of location, the risk of retrace is HIGH and even though it is possible to push somewhat higher, the potential is very likely to be limited. This means this is a time to be more cautious, defensive and selective, NOT “feeling safe”.

Why am I so contrarian here? There is no structural evidence that a broader retrace is in play, or even beginning. The red flag can be spotted when you compare other markets like the S&P 500 and Russell 2000 which are not pushing new highs like the NSX. The S&P in particular still has significant resistance around the 3200 area which means a proportionally large number of stocks are NOT participating in this race to the moon. A healthy rally is one where they are more or less in sync.

Keep in mind, I am not calling for a bear market, or a trend reversal. I am anticipating a healthy retrace and the nearest level of support on the NSX is the 10,200 area. If that is taken out, the next inflection point is around the 9750 area (historical market peak) and IF that is taken out, 9150 is next.

That is a significant move from current levels, but that is what we must consider in terms of risk. The retrace can come out of no where, and a chart will NOT provide any kind of “predictive” value until supports are taken out, and some kind of clear bearish structure is established which is a process that can take days or even weeks. In any case, the herd mentality is often the strongest at market turning points, learn to anticipate it, not participate in it.

S&P 500 Has Room to Run Higher, Says Raymond James Strategist

U.S. stocks ended the week low, erasing previous gains amid investors’ pessimism as some states saw a second wave of COVID-19 infections. The Dow Jones Industrial Average gained 1.0%, the S&P 500 increased 1.9%, and the NASDAQ jumped 3.7% last week.

Although economic data remained mixed, showing that the recession brought in by the COVID-19 pandemic may be sharp, but will not sustain for long. However, markets recovered to a bullish stance again this week after the Federal Reserve announced stimulus for corporate bonds, leading to tighter spreads, which lent a helping hand to riskier assets.

“On the positive note, we got further confirmation from the Fed that it will remain supportive. Potential COVID-19 treatments, improvement in economic data, and further fiscal stimulus could push the market closer to our upside case scenario of 3,384,” wrote Michael Gibbs, director of equity portfolio and technical strategy at Raymond James.

“We use 3,111 as our base case S&P 500 price target for 2020. With the S&P 500 currently trading in line with this target, we would look to accumulate favored sectors during market volatility. Moreover, the market will need to pass the baton from valuation expansion to re-acceleration of economic and earnings expansion. We believe this could cause some periods of volatility as this transition takes place and would use any dislocation to add to positions.”

Raymond James in its weekly market guide noted that earning per share growth has seen stabilization as earnings season approaches. While it is largely expected to be a very challenging quarter, it is also expected to be the trough in earnings for this recessionary period. S&P 500 earnings are expected to drop 43.2% year-on-year.

While this continues to point to the severity of the economic situation, the recent stability, not just for the second quarter of this year, but also for the third and the fourth quarters, points to some expectation that the worst is likely behind us. However, the worst-case scenario may be averted.

The sectors that have seen the largest earnings revisions since the end of 2019 have been the more cyclical sectors such as Energy, Consumer Discretionary, Industrials, and Financials, Raymond James strategist added.

For a look at all of today’s economic events, check out our economic calendar.

Major Stocks around the world fall, COVID-19 new cases strengthening upward

Asian stocks and U.S Stock futures slumped Thursday morning

As rising caseloads of COVID-19 in parts of America and China dampened hopes of a quick global economic recovery from the most damaging disease ever to hit the human race.

“This tightening will likely negatively impact the economic recovery,” Goldman Sachs analysts said of authorities’ moves to lock down parts of the Chinese capital in response to the current outbreak.

S&P 500 mini futures dropped about 1.2% in at Asia’s trading session while the MSCI’s broadest index of Asia-Pacific shares excluding Japan dropped as much as 1% in value.

In addition, Japan’s Stock Index Nikkei 225 lost 1.3% while in China, Chinese blue-chip index CSI300 shares also lost about 0.1% in early trade.

Asian stocks and U.S Stock futures slumped Thursday morning as rising caseloads of COVID-19 in parts of America and China dampened hopes of a quick global economic recovery from the most damaging disease ever to hit the human race.

“This tightening will likely negatively impact the economic recovery,” Goldman Sachs analysts said of authorities’ moves to lock down parts of the Chinese capital in response to the current outbreak.

S&P 500 mini futures dropped about 1.2% in at Asia’s trading session while the MSCI’s broadest index of Asia-Pacific shares excluding Japan dropped as much as 1% in value.

In addition, Japan’s Stock Index Nikkei 225 lost 1.3% while in China, Chinese blue-chip index CSI300 shares also lost about 0.1% in early trade.

In America, the S&P 500 dropped 0.36% yesterday, however, the tech powerhouse index Nasdaq kept its record-breaking momentum by added 0.15% due to hopes of increased demand for various online services such as online video streaming, remote working and cloud-based services due to the epidemic that had restricted human activities globally.

Meanwhile, China’s announced cancellation of flights, shut educational institutions and sealed off some neighborhoods as it increased efforts to limit COVID-19 resurgence that had strengthened fears around Asia’s economic tiger.

“It is a big shock to markets that China, which appears to have successfully quashed the disease, is seeing a second wave. And in the U.S. we see record cases in many states,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

“All this suggests that the more you re-start the economy, the more infections you have. People have thought the economy will quickly recover in July-September after dismal April-June. But that is now becoming uncertain.”

Global Investors according to reports from Reuters rushed to the safety of U.S bonds, with the 10-year U.S. Treasuries yield dropping by 3 basis points to 0.704%.

For a look at all of today’s economic events, check out our economic calendar.

Playing the FX Cross in the Wake of the FOMC

The Fed aren’t going anywhere

There is little doubt the Fed was dovish, and the gravy train is going nowhere with future asset purchases continuing at the current pace of $80b p/m and MBS $60b p/m, which should underpin risk for some time. Judging by the bank’s economic projections (and dot plot) interest rates are not going up well past 2023, and the conversation on yield curve control (YCC) was certainly explored a few times, something Powell said was still “an open question”.

One suspects if they are going to announce YCC it will take place in the September meeting, and that meeting will be a biggy as it will give them a decent stretch to see how their many programs, not to mention economics, are evolving and the impact they are having on getting them towards its mandate.

When we consider YCC, I would expect the Fed to focus on the 3-5-year Treasury curve, more akin to what the RBA is doing than the BoJ, although there are a ton of questions around its commitment and of course what level (of yield) would they target.

Real Treasury yields promoting a bid in gold

For now, though we see a solid move lower in nominal yields, with the Fed importantly managing to generate a positive move higher in inflation expectations, with 5-yr Breakeven rates moving +3bp and above 1% for the first time since 9 March. This has resulted in US 5-year real Treasury yields collapsing 11bp to -70bp. For gold traders, this is all that matters and for gold bulls, it is the perfect storm, especially when married with such as the bearish trend in the USD.

Gold has been happy to track the 1750 to 1650 range since mid-April, and I have argued many times, the answer lies in the bond market and it appears to be playing out – Is this the time we finally see a solid break of the range?

Daily gold chart

The move in bond yields has propelled the NAS100, which will feed off lower yields every day, with the Fed keeping the punchbowl in the mix for as long as it takes. On the other hand, the dour economic projections have really made it clear that the Fed sees the prospect of a V-shaped recovery as incredibly low, so we’ve seen the Russell 2000 lower by 2.6%, while the S&P500 fell 0.5%, held back by financials (thanks to the flatter yield curve), and energy (crude fell 2.2%). Asia is feeding off these leads and risk is under pressure, with traders taking a bit off the top.

The USD is heading lower longer-term

If we consider the Russell 2000 is more reflective of inward factors and the US economy, it perhaps tells us why the USD is also being further shunned. The US is no longer the standout and almost isolated destination for global savings that it has been in recent years, and investors now have a choice and have redistributed capital accordingly. Lower yields are certainly incentivising an offer in the USD too, especially with raised prospects of YCC the months ahead. Why? Because if the Fed is going to add an extra measure to further increase its balance sheet through unlimited bond purchases, to fix a specific parts of the Treasury curve at a given yield, then it just increases the prospect of deeper negative real yields and an ever bigger balance sheet.

After a big move in the USD – Trading FX from a tactical standpoint

From a tactical perspective, the USD may still in the doghouse, but if the S&P500 is looking at the Fed’s dour economic projections, the index could find a few headwinds in the near-term. Despite liquidity, if the S&P500 tracks lower then global growth proxies such as AUD, CAD and MXN may also struggle near-term. It makes the currency crosses become a more attractive trading vehicle.

I am watching EURCAD. After some messy price action, the buyers are starting to get a better say here and should crude come off further and we start to see a few more sellers in the S&P500 then the funding currencies (EUR, JPY, CHF) will outperform. Whether this starts to trend is questionable, but the battle lines are drawn.

If playing the USD, AUDUSD is looking more vulnerable, but EURUSD is still strong and would be a preference if keeping the USD in play.

We see price still holding the 5-day EMA and there are few reasons to be short with any genuine conviction on current price action – happy to stay bullish here, where a close above 1.1383 would open up 1.1500. Will turn more neutral on a break of 1.1321.

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Chris Weston, Head of Global Research at Pepperstone.

(Read Our Pepperstone Review)

Risk Taking Pauses Ahead of the ECB

The S&P 500 gapped higher yesterday, and that gap (~3081-3099) offers technical support. Benchmark 10-year bond yields are firmer. The US 10-year yield is rising for the fourth consecutive session around 74 bp is at the upper end of a two-month range. The dollar is trading higher against most currencies. Among the majors, those that have been among the strongest, like the Australian dollar, sterling, and the Scandi’s are the weakest today, adding to the sense of profit-taking and corrective forces.

Emerging market currencies are also softer, with the JP Morgan Emerging Market Currency Index struggling to extend a five-day rally. Gold is recovering from yesterday’s sell-off that saw nearly one-month lows (~$1690) and has resurfaced above $1700, the middle of a $100 range that largely confined it for the past two months. Oil is consolidating after the July WTI contract rose to nearly $38.20 yesterday, its highest in almost three months.

Asia Pacific

Hong Kong dollar forward points edged lower but bounced higher in late dealings, and the five-day drift lower has ended. Both the three-month and 12-month forward points rose today. We will continue to monitor them as a key gauge of tension. That said, we expect the Hong Kong band to remain in place for some time. Separately, the PBOC set the dollar’s reference rate (CNY7.1012) a little lower than the bank models suggested (~CNY7.1035).

After falling for four sessions, the dollar is firmer against the yuan for the second consecutive session. The yuan’s weakness is most evident against the basket (CFETS) that the PBOC is said to track. The yuan has fallen for the better part of three weeks and is at its lowest level against the basket since early January.

Under pressure from the US, China has resumed allowing foreign inbound flights. These had been canceled during the peak of the pandemic, and officials have been reluctant to normalize the situation. Yesterday, the US threatened to lift Chinese airline flights to the US to one for everyone China lets of US flights. Although we are sympathetic to the framing of the US-China relations as a “Cold War”– the multifaceted competition that is an organizing principle of international relations–this dispute is small beer. The tit-for-tat tactics, however, does illustrate the US penchant of unilateral action, where a coalition may have been possible as China’s asymmetrical actions impacted other countries as well.

Australia reported April trade figures. The surplus of A$8.8 bln was larger than expected, even if down from the A$10.4 bln surplus recorded in March. The 11% decline in exports was a bit less than forecast, while the 10% decline in imports was more than expected. The average monthly surplus through the first four months stands at A$7.1 bln. The average for the same period in 2019 was almost A$4.8 bln. Separately, Australia reported that retail sales fell by17.7% in April from March, mainly in line with forecasts.

The dollar’s surge against the yen continued. The greenback reached JPY109.15 in late Asian turnover before succumbing to mild profit-taking. Initial support is seen near JPY108.80, where a $1 bln option is set to expire tomorrow. On the upside, the next important technical target is near JPY109.50. Recall that the dollar finished last week near JPY107.80. The Australian dollar is trading comfortably inside yesterday’s range (~$0.6855-$0.6985). A loss today would snap a five-day rally that began from around $0.6620.

Europe

The ECB meeting is expected to result in an expansion of the Pandemic Emergency Purchase Program by 500 bln euros. Anything less would be disappointing. Roughly a third of the 750 bln euro allotment has been used. At the current pace, it will be exhausted by the end of Q3 or early Q4. The logic of expanding it now is that the staff’s updated forecasts will likely confirm Lagarde’s recent comment that the mild scenario can be ruled out. That implies an 8-12% contraction this year.

The staff forecasts themselves will be of interest, but the importance lies in providing the ECB will new “facts” that arguably will compel new action. There may be some other action the ECB considers, such as not only accepting bonds that have recently lost their investment-grade status as collateral but perhaps buying them outright, as the Fed has begun doing. It could also adjust the amount of reserves that are subject to negative rates. The ECB could also choose to make the terms of the Pandemic Emergency Long-Term Refinancing Operation more attractive, as the initial take-up was light.

Lagarde will likely be asked about the German Constitutional Court ruling on the ECB’s other bond-buying program and the euro, which is enjoying its longest advance since late 2013. Yesterday was day seven of the streak, and the 0.55% rally was sufficient to put higher on the year. On a purely directional basis, the euro is enjoying its highest correlation (~0.86) with the Dow Jones Stoxx 600 since May 2012. The 60-day correlation (~0.2) is not even at the highs for the year, indicating that the tighter co-movement is new.

This fits in well with our argument that it is a liquidity-driven story. And some argue that it is well discounted, but that might not do justice to the incentive structure that is ongoing and helps explain, for example, the incredible demand for the surprise sale by Italy of a ten-year bond yesterday. It announced the sale on Tuesday. Usually, Italy’s debt managers give more notice. Italy received bid for nearly 107 bln euros for a 14 bln euro syndicated offering, which is more 100x more demand that was seen for the ECB’s Pandemic Emergency Long Term Refinancing Operations (loans at minus 25 bp).

After much debate, the German government agreed on a 130 bln euro package (~4% of GDP) to support the economy. It includes several measures aimed at boosting consumption such as a temporary cut in the VAT (16% vs. 19%), 300 euros per child, and doubling the incentive to purchase electric cars. Germany is embracing counter-cyclical fiscal spending, something that it traditionally leans against (see ordoliberalism).

However, the crisis is extreme, and the headline figure is not quite what it may appear at first glance. Almost half (60 bln euros) is left over from the March supplemental budget, and not all the stimulus is targeted for this year. Nevertheless, it helps position Europe’s largest economy for a stronger recovery.

The euro’s longest advance in six and a half years is threatening to end with today’s pullback. It reached almost $1.1260 yesterday and has dipped below $1.12 in Europe today. The rally has been so sharp that initial support might be closer to $1.1170-$1.1180. Sterling poked above $1.26 briefly yesterday and stopped short of the double top from April in the $1.2640-$1.2650 area. It is testing the $1.25 area in late morning turnover in London. There may be some support around $1.2480, but stronger support is not seen until closer to $1.2400.

America

In our bizzaro world, the 2.76 mln private-sector job loss estimated by ADP is good news. The median forecast from the Bloomberg survey was for a 9 mln decline. April was revised to show 19.55 mln job loss instead of 20.23 mln. The non-manufacturing ISM employment showed little improvement (31.8 from 30.0). The official data will be released Friday. The median forecast in the Bloomberg survey is for a loss of 7.25 mln private-sector jobs in May, and 8 mln overall. Still, the “whisper number” will be less.

Note that the ADP data includes furloughed employees, while the monthly jobs report (Bureau of Labor Statistics) does not. Weekly jobless claims are expected to come down below 2 mln, for the ninth consecutive week of serial improvement. Separately, Canada and the US report April trade balances today, but it will be obscured by the weekly jobless claims and the ECB press conference.

If anything, the Bank of Canada was a bit more optimistic than anticipated. It noted that the country may have escaped the worst-case scenario and expects the economy to contract 12%-22% from peak to trough rather than the 15%-40% risk it previously saw.

It sees a 10%-20% decline this quarter. The Bank also indicated it could reduce some of its operations (frequency of repo operations decreased to once a week and the banker acceptances to twice a week) as it shifted from supporting the financial markets to supporting the economy. Deputy Governor Gravelle will deliver the Economic Progress Report tomorrow, and it allows more insight into the central bank’s thinking as Macklem takes the helm.

For the third session, the US dollar is finding support around CAD1.3480. It has not bounced much and remains stuck in the trough. It needs to move above the CAD1.3575-CAD1.3585 area to confirm a low is in place. The 200-day moving average is found near CAD1.3460, and the greenback has not traded below it since late February.

The US dollar fell to MXN21.51 yesterday before reversing higher, leaving a bullish hammer candlestick pattern in its wake. There has been some follow-through dollar buying. In fact, today is the first session since May 12 that the dollar has risen above the previous session’s high. The dollar has risen above MXN21.97 today. Initial resistance is seen near MXN22.10. The week’s high was set on Monday near MXN22.28, and a move above there would confirm a potentially important low is in place.

This article was written by Marc Chandler, MarctoMarket.

Risk Appetites Wane

Europe’s Dow Jones Stoxx 600 is off a little more to double this week’s decline and leaves it in a position to be the biggest drop since panicked days in mid-March. US shares are narrowly mixed, but coming into today, the S&P 500 is off 3.7% for the week, which, if sustained, would also be the largest decline in nearly two months.

Bond markets are better bid, and the US 10-year benchmark is off four basis points to 61 bp, the lowest in three and half weeks, despite the deluge of supply. European yields are off 1-3 bp. The dollar is firm against nearly all the world’s currencies. The yen, among the majors, and the Turkish lira and Russian rouble in the emerging market space, are the notable exceptions. Oil and gold are near five-day highs (~$1720 and $27 basis July WTI)

Asia Pacific

Australia reported a massive 594k job loss in April. While it was slightly more than most economists expected, given the magnitude, the median forecast of the Bloomberg survey for a loss of 575k proved fairly accurate. About 220k were full-time positions.

The unemployment rate rose from 5.2% to 6.2%. Economists had projected a jump to 8.2%. Australia’s 10-year yield is dipping below 90 bp for the first time this week. Wednesday saw record demand at the 10-year sale while the central bank has stepped back from its purchase program.

The Bank of Japan has also reduced its buying of equity ETFs and REITs. Its JGB buying had been tapered under its yield curve control initiative. Back in the particularly dark days in March, the BOJ bought a little more than JPY200 bln of the ETFs on four different occasions.

In the first five sessions of May, it purchased a total of JPY126.5 bln. Separately, a BOJ lending initiative in April that pays banks 10 bp on reserves associated with lending under the program is off to a successful start, and BOJ Kuroda hinted at an emergency meeting before the next formal meeting (June 16) to unveil a new facility to lend to small businesses.

Following the Reserve Bank of New Zealand’s move to put negative rates on the table, the government approved an NZD$50 bln (~$30 bln) stimulus package. It projects that the country’s debt will rise over 53% of GDP from less than 20% last year.

The 10-year benchmark bond rose six basis points today from the record low hit yesterday below 60 bp. Year-to-date, the Kiwi is the second worse performing major currency, off a little more than 11% (behind the Norwegian krone that has depreciated by nearly 13.7%).

The dollar rallied from JPY106.40 to almost JPY107.80 on Monday, and that has marked the range, for now, the third session. Narrower still, the greenback is within yesterday’s range (~JPY106.75-JPY107.30). There are two sets of expiring options to note today. There is about $1 bln at JPY106.75-JPY106.82 and another $1.1 bln in options struck at JPY107.00-JPY107.05 This is the fourth consecutive session that the Australian dollar is falling.

It is the longest streak since late March and early April. Watch the 20-day moving average. It is found near $0.6430 today, and although it has been flirted with on an intraday basis, it has not closed below it since April 3. A break of the $0.6375 area may be needed to confirm the top we have been anticipating. The dollar is little changed against the Chinese yuan and is hovering around the CNY7.09-CNY7.10 area, the upper end of its recent trading range.

Europe

Bank of England Governor Bailey hinted that the GBP200 bln bond purchase program will likely be extended as early as next month (next MPC meeting is June 18). Recall that at last month’s meeting, the majority wanted to wait while two members dissented in favor of an immediate increase of GBP100 bln in Gilt purchases.

While much attention has been focused on the fact that some derivatives in the US imply negative rates, the UK 2-year Gilt has a negative for the third consecutive session (about minus 3 bp). Since our experience with negative rates is so limited, we relied on induction to derive a hypothesis that countries with negative rates had central banks that led the move and have current account surpluses. That hypothesis is being tested. We suspect that the currency would have to bear more of the burden if this turns out to be the case.

The euro reached a seven-day high yesterday and approached $1.09 before reversing lower and recording new session lows late in the session near $1.0810. It is in about a 15-tick range on either side of that level, with little enthusiasm in either direction. There is a 1.2 bln euro option at $1.08 that expires today. Below there is an option for 1.8 bln euros at $1.0750.

The euro settled last week near $1.0840. Sterling fell to $1.2180 today, its lowest level since April 7, when it recorded the month’s low near $1.2165. It is lower for the fourth consecutive session, which is also its longest losing streak since March. Initial resistance is now seen near previous support in the $1.2250 area.

America

Powell had no more luck than his colleagues in removing the risk that the Federal Reserve will adopt a negative interest rate target. The implied yield of April 2021 through March 2022 fed funds futures contracts remains negative. The OIS forward curve is slightly negative two and three-years out. The impact on the dollar seems minimal at best.

It is higher against all the major currencies this month, but the Norwegian krone (~0.60%) and yen (~0.30%). Overall, Powell’s economic assessment was very somber. He indicated that a report out today will show that 40% of the households under $40k a year income, who had a job in February, lost it. Powell advised not placing much stock in estimates of full employment. The Chair tends not to put weight on economist’s intangible concepts like r-star (natural interest rate) or full-employment.

Powell called for more fiscal support, a day after the House of Representatives prepared an additional $3 trillion spending bill. When coupled with Dr. Fauci’s comments the previous day, calling for more testing and tracking, and slowing the re-opening process, the message appears squeezed risk appetites.

There are two highlights of the North American session today. First is the release of the US weekly initial jobless claims. Economists expected a decline to 2.5 mln, which is still around ten-times larger than what was prevailing before the crisis. It has been gradually declining since reaching above 6.8 mln in late March. Separately, the continuing claims are likely to push above 25 mln.

Note that the survey for the next monthly jobs report is being conducted this week. Second, the central bank of Mexico meets today, and the consensus forecast is for a 50 bp cut to 5.50%. A week ago, Mexico reported that April CPI fell to 2.15%. Given this and the broad stability of the peso, we suspect that if Banxico is to surprise, it is more likely to deliver a larger rather than a smaller cut.

For the fourth consecutive session, the US dollar has edged above the previous session’s high against the Canadian dollar. However, it is better offered in the European morning. The CAD1.4040-CAD1.4060 may provide support today, but it seems particularly sensitive to the broader risk appetites.

Tuesday’s range in the greenback against the Mexican peso is to be watched (~MXN23.75-MXN24.40). After rallying strongly in March and into early April, the US dollar has been consolidating for over a month and has largely been confined to a MXN23-MXN25 range. Lastly, note the EIA reported the first decline in US oil inventories (-745k barrels) since the middle of January.

Holdings in Cushing fell by 3 mln barrels. This, coupled with the IEA assessment of a marginal improvement in supply (reined in) and demand (a little stronger) dynamics, are helping to underpin prices today.

This article was written by Marc Chandler, Marcto Market.

Potential Trend Change in Market

As of the regular trading hours open, the S&P was around the same spot as yesterday’s closing price area of 2850, which coincides with our key 2850 level discussed below.

What is the bias/gameplan going into today?

For intraday purposes, we’re going into today as neutral-biased given the overnight reaction relative to our key levels, as the ongoing ferocious battle is still a potential trend change on the daily chart.

If we zoom out, we remain bear-biased going towards around 2650 per our 4-hour white/red line projections from earlier this week, but we are still waiting for more clues/confirmations. Bears need some sort of a day 2 setup to the downside eliminating the daily 20EMA trending support in a decisive manner in order to prove that the big, bad, real bears rotate back in town instead of gummy bears.

Fun fact, the bull train has bottomed out relative to the daily 20EMA trending support area every single time since the April 6, 2020 breakout, allowing us to catch and milk ES points and profits in textbook fashion. Will this time be different? We don’t know, but we are definitely prepared if and when the sh*t hits the fan. Otherwise, we BTFD at support again and keep milking this bull train.

For the next few sessions, the only thing that truly matters is whether price action maintains above 2850 or not on a daily closing basis. A breakdown below 2850 would be the first indication that big, bad, real bears rotate back in town, so we must stay vigilant.

For what it’s worth, there are lots of market participants that are getting complacent as the market has been nearing the ES 3000 psychology number by grinding up since the March 23 lows, and now everybody and their mother has been accustomed back to BTFD and getting PTSD from shorting.

This is why I suggested last Friday that doing homework over the weekend was imperative as you have pre-determined levels drawn up so that you could react quickly, if need be, in the first few sessions/weeks/whatever. You are prepared no matter what.

What should be your next step?

What’s your sh*t hits the fan level? What’s your first clue? What are your major resistances? For reference, the past 2 week’s high = 2965, 2 week’s low = 2771. The decent range for now.

See chart reviews and projections on the Emini S&P 500.

By Ricky Wen, an analyst at ElliottWaveTrader.net, where he hosts the ES Trade Alerts premium subscription service.

$3 Trillion Tsunami looms on US Markets

Futures on the index show an upward trend this morning, growing another 1.1%. This recovery did not fully offset the decline of previous days. However it  pushes the same thoughts as last week, when we saw profit-taking after a firm April for the stocks.

Additionally, it is encouraging that the indices are growing quite evenly. Very often it is a sign of confident purchases for the long term rather than speculation on the latest news. Along with the growth of stocks, the dollar has turned to decline. It seems that the demand for dollars was satisfied.

The Fed has managed to quench the dollar thirst, and now reduces the volume of purchases on its balance. In the last two weeks of March, the balance sheet increased by $557B and $586B, while the latest data showed that it increased by “only” $83B. If you assess the actions of the Fed by the dynamics of the dollar, the US Central Bank managed with thin balance in its operations.

However, the financial system is movable. And now there is a new, no less stressful test coming. The US Treasury Department is going to attract about $3 trillion in the second quarter of the year in its updated borrowing plans. This is five times higher than the previous quarterly record in 2008.

The big question now is what impact this will have on the markets. Historically, such situations have been negative for the markets, as investors will prefer highly reliable US government securities to riskier stocks. On a much smaller scale, this happened in September last year. Back then, the Fed was helping markets by injecting liquidity and can do so now, again dramatically increasing asset purchases on the balance sheet. This is not the only case. The US Treasury bills are regularly placed on a large scale, and the dollar is strengthening. It is an approach based on history.

But there is another approach, the one based on the logic. Besides the US Treasury offer, US bonds government bonds are thrown into the market by many EM countries, that sell their FX reserves to help the economy and keep national currencies from free fall. It may well turn out that the dollar debt may be too large in the markets. In this case, the value of dollar debt may begin to decline, because there will be too much of it.

However, the Fed only comes into play when the situation gets out of control. Will, the US Central Bank, act proactively this time, or will we see signs of a significant shift in balance before the regulator intervenes? Either way, this impending debt placement tsunami is unlikely to be quiet.

by Alex Kuptsikevich, the FxPro senior market analyst

This Market Makes No Sense

The stock market and the economy

As I have always tried to make people understand, the stock market and the economy are not one and the same. Rather, there is a reason that the stock market is considered the best “leading indicator” for the economy. And, it is purely because market sentiment (the true underlying driver of the stock market) is seen in action much quicker within the stock market as relative to the fundamentals within the economy, which take time to catch up to the market action.

To put it most simply, consider how long it takes you to effectuate growth in a business when sentiment turns bullish (obtaining funds, placing those funds to work in producing goods and services, marketing and selling those goods and services, earning profits, etc.) as compared to how long it takes to press the button on a computer to buy a stock. It is simply much faster to effectuate a turn in sentiment in the stock market than in the economy. And, this lag explains why the stock market always bottoms well before you see a turn in the economy.

As I read in other articles of late, it is quite clear that many have missed this rally off the 2191SPX bottom and are in complete disbelief due to their lack of understanding of what I just outlined above.

In fact, these are a smattering of the comments I have received from my prior two articles wherein I was calling for higher levels to be struck in the market:

“This “market” is so RIGGED it’s pathetic . . . Highest unemployment in decades and the “market” roars back faster than it ever has in over EIGHTY YEARS? I feel like I’m in some parallel matrix of backwards reality”

“buying in to this rally is absolute suicide.”

“If you think this is over you are simply wrong”

“This bear market is just getting started.”

“Bulls are so incredibly delusional if they think this is over”

While it is clear that most investors have reacted quite emotionally to the events of recent days, that is often the worst way to approach the market. So, let’s take a step back and review where we have been and then we can look to where we are likely going.

For those that have been following my analysis closely, you would know that I was building a short position in the EEM back in January and February, as it was presenting the clearest break down pattern, along with providing us with a very low risk set-up with wonderfully defined parameters. Moreover, as I wrote regarding the SPX late last year and early in 2020, if the market was going to break down below the 3100SPX level, it would open the door to take us back down to the 2200SPX region.

And, as we approached that 2200SPX region in March of this year, I highlighted to the members of ElliottWaveTrader my expectation that the SPX should bottom in the 2187SPX region, and rally back up towards the 2600-2725SPX region from there. As we now know, the SPX bottomed at 2191 (within 4 points of my targeted support), and we clearly rallied back to our original 2600-2725 target.

However, as the market moved into the 2600-2725SPX target zone, the structure made it quite clear to us that this rally had not run its course. Rather, the structure was actually pointing us to the 2890SPX region, as I highlighted in my last public article as well. So, we set our sights on the 2890SPX target. The market then proceeded to rally to the 2879 level (within 11 points of my target), whereas the futures struck my target.

For those that followed my analysis closely, you would know that once we struck this target region, I expected a pullback to be seen. Ideally, that pullback would hold the 2700SPX region before continuing higher. As we know today, the market proceeded to pullback from the 2890SPX target region, and bottomed at 2727SPX. Thereafter, we began a rally that has struck a high of 2955SPX (with 20 points higher seen in the futures).

Now, you are either thinking to yourself that this is the luckiest guy in the world or that this is some kind of voodoo.

 

 

Elliott Wave analysis

But, to be honest, this is simply our Fibonacci Pinball system of Elliott Wave analysis, which provides us with these high probability targets on both the upside and downside as the market acts as a pinball through these Fibonacci extensions and retracements we track in the standard structures we see quite commonly in the market.

When the market is acting in a standard manner, then it moves through these targets in an almost perfect “pinball-like” manner. However, if the market reacts in a manner outside of these standards, it provides us an early warning that something else is playing out and allows us to move into our alternative plans, which have been outlined well before the diversion from the standard occurs.

So, what does our methodology suggest at this point in time? Well, when the market rallied into the 2900-2950SPX region this past week, the structure of the market told me that the risks have risen high enough for me to suggest to the members of ElliottWaveTrader that they should significantly reduce their long positioning within the 2900-2950SPX region. Allow me to explain.

In the most bullish case scenario, we expected the market to rally from the 2191SPX region back up to the 3200/3300SPX region. That means that once we moved into the 2900-2950 region, we caught 70% of this rally off the March low rather safely. But, the last 30% carries with it the most risk, as I cannot be certain that the market will reach the most bullish target in my expectations.

Now, this is where our Fibonacci Pinball method of Elliott Wave analysis provides us even more insight when it comes to market context. Even if the market provides us with the most bullish scenario of a rally to the 3200-3300 region, I would then expect a pullback in the market to the 2600-2800 region. So, considering we caught the rally from 2191 to 2950SX, and we will likely come back down to levels lower than that later this year, I questioned if it was really worth the risk for the remaining 30% overhead?

So, as I outlined to the members of ElliottWaveTrader.net, the easy money on the long side in the market has been made as we moved into the 2900-2950SPX region. And, now the market is going to tell us in the coming two months whether it will continue higher to complete 5-waves off the 2191SPX level or not.

If we do complete those 5 waves into the 3200-3300SPX region, then I am going to prepare to “buy-the-dip” into the 2600-2800SPX region. However, if the market is unable to complete this 5-wave rally structure off the 2191 low, then it will open the door to a drop to the 2060SPX region in the coming months. While I am going to leave the finer details of how I view this within the members section of ElliottWaveTrader.net, I hope I am being clear that risks have risen to the point where one has to question if they are worth the rewards on the long side of the market at this time.

So, again, if you have been following my work, then not only did you catch most of the decline earlier this year, but you have now also caught the rally from the 2200 region to the 2900 region. I would say you have now likely had the best year of your career, and it is time to head to the sidelines to see how the next few week’s shake out.

But, this brings me to other comments I see quite often. And, it really gives me a chuckle when I see them from fellow Seeking Alpha “contributors,” such as this one, which was posted in response to my public analysis calling for a major rally off the 2200SPX region:

“You want “really silly.” That’s really silly. And anyone who cannot see that isn’t playing with all their circuit breakers on… The market is delusional, and you, rather than following the news cycle, which obviously the market is not following, are following the market.”

Well, my friends, those that have been following the “news cycle,” as suggested by this other “contributor,” have been scratching their heads as the market has rallied 35% off the lows we caught back in March. And, yes, we have been following the market. Does that make the 35% we have earned on the long side a delusion? Well, I keep looking at my account and it certainly looks real.

And, that last sentence penned by this “contributor” really made me scratch my head. If one realizes that the market is not following the news cycle, does it make sense to continue to follow the news cycle? Well, I guess if your goal is to prove that you are smarter than the market, you continue to follow the news cycle. But, if your goal is to maximize profits from the market, then you have to question what this person is really doing.

You see, folks, markets do not work based upon news cycles and logic. Rather, markets are driven by emotion. And, unless you understand how emotion drives the market, you will be standing on the sidelines, scratching your head, and thinking the market is delusional due to your superficially correlated news cycle perspective, while others reap the profits from their more sophisticated and advanced level of understanding the market.

I have said this before, and it is certainly worth repeating. Unless you understand the larger market context, then you will often be scratching your head when you see moves that defy logic. And, I have not seen any better methodology to provide market context then our Fibonacci Pinball method of Elliott Wave analysis. Does that mean we will always be right in our assessments? Absolutely not. But, our analysis is quite accurate the great majority of the time. And, if the market deviates from our primary analysis, we are able to adjust rather quickly, as that is also part of overall methodology.

At the end of the day, some of you view me as crazy, some of you view me as practicing voodoo, and some of you view me as simply lucky. But, you will never be able to view me as a perma-anything. You see, those that are perma-bulls will be right most of the time because the market rises the great majority of the time. Yet, they will also get caught looking the wrong way during the periods of major draw-downs, such as what we experienced in February and March of 2020. And, those that are perma-bears are more like a broken clock. But, when they are “right,” boy do they turn loud and boisterous. And, we certainly heard from them in March, yet they have been rather quiet in April.

As for me, I am perma-profit. My goal is to simply listen to the messages in market price structure, and endeavor to be on the correct side of the market for the greatest majority percentage moves the market has to offer, while balancing reasonable risk management strategies.

So, to answer that “contributor’s” comment to me in my last articles, yes, I will continue to discount the news cycle and follow the market. And, while you may consider me to be “delusional” in doing so, the profits earned by me and the members of ElliottWaveTrader are clearly not a delusion.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuringhis analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.

Speculators Look Beyond Tank Tops to Accelerate Oil Buying

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, April 28. The risk on seen during this period was driven by hopes, perhaps in some cases premature, that the COVID-19 pandemic had started to loosen its stranglehold on the global economy. The S&P 500 jumped by 5% while the dollar and bonds traded softer.

Hedge funds were net buyers of energy and metals while they continued to sell agriculture commodities during the week to April 28. The prospect of production cuts and lock-downs starting to ease spurred speculative demand for crude oil and natural gas while copper short-covering continued. Gold and silver only attracted a small amount of buying despite rallying by 2% during the week. Baring a few exceptions such as soybeans, cotton and cattle, broad based selling across the agriculture sector continued.

Energy

The collapse to negative prices the previous week strengthened speculative demand for WTI futures. This in the belief that the current price weakness would support a rapid reduction in US production while attempts to ease lock-downs would spur a pickup in fuel demand.

The WTI net-long jumped by 74k lots or 35% to 283k lots, a 16-week high. The recovery in Brent crude oil net-longs have been much more slow and primarily due to short-covering. During the past four weeks funds cut short positions by 72.5k lots while only adding 14k lots of fresh longs. Overall the combined long in WTI and Brent rose by 83k lots to 426k, a three-month high.

Natural gas continued to be bought with the combined net long in four Henry Hub deliverable futures and swap contracts reaching a one-year high. Natural gas futures capped its best month in April since November 2018 with associated production from oil wells expected to shrink as drillers make deep cuts to production.

Metals

For a sixth week the gold net-long remained stuck in a 180k to 200k lots range. It highlights the current lack of clear direction with gold struggling to break away from $1700/oz. Silver meanwhile remains troubled by its recent bouts of volatility and for a fifth consecutive week funds made only small adjustments to maintain a long exposure some 80% below the February peak. Funds cut net bearish HG copper bets to 14-week low as the price rallied by 4% to test key resistance just below $2.40/lb

Agriculture

An overall negative week in terms of price action across the key crops of corn, wheat and soybeans had no impact on the fund net which remained close to its five-year average.  In softs, both sugar and cocoa rallied strongly into the weekend after funds began scaling back short positions in response to an improved outlook. Sugar rallied on the back of a recovery in oil potentially renewing demand for sugar-based ethanol while cocoa rose to challenge technical resistance at $2400/MT.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock indexes, currencies, and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials, the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behavior of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.
This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire