The XJO is expected to open lower this morning, near 8,600 at time of writing. The U.S closed practically flat Friday night, giving little to no leads for our market. Their futures are also flat this morning.
Both markets have been tracking sideward for almost two weeks. The consolidation is a very tight range. For our market, it is between roughly 8,550 and 8,650. For the U.S, they are simply grinding along the top of their range near all-time highs. Neither market seems to know where to track next.
Our downtrend line broke mid last week from the extended sidewards movement. We may still be trading in downtrend however, which is characterised by lower peaks and troughs. We may simply be seeing it shallow out rather than change. It is too early to say, especially with the downtrend itself being relatively flimsy, with not many lower peaks and troughs to entrench itself.
How we trade from here will likely continue to be largely dictated by the U.S. However, our moves may not be as exaggerated. Their market is trading near all-time highs. Our market is about five per cent lower from our own. The U.S has plenty of room to fall, and perhaps good reason to do so. However, our market is already trading relatively lower so we may not be as excessive in our selling. In the same way, we may not want to price in their gains if they do indeed break higher and make fresh all-time highs. We’re clearly not as optimistic as they are, and our market hasn’t much to look forward to. We are still likely to be dragged higher, but our moves will likely be more subdued.
The exception seems likely to be if the U.S sees hard and excessive selling. If they drop several per cent in a short timeframe, our market is unlikely to show any courage or resilience.
8,500 is roughly the next key level, as it is roughly where the 200 day MA comes in. Beyond that, 8,400 to 8,450 represents the recent lows of our market. To the upside, if 8,650 were to break, then the next clear target is 8,750 and 8,800 – both a clear level of resistance and where the 50 day MA comes in. At this stage, given the downtrend, we can only assume that the market will continue to track sideward to lower.
What could cause a spike in volatility and shake markets up is key macroeconomic data this week. It’s a huge week. The RBA will have an interest rate decision tomorrow at 2:30pm (AEDT), where they are likely to keep the cash rate at 3.6%. However, our market, which is going through interest rate cut withdrawal symptoms, will be looking for future guidance. It seems unlikely the RBA signals a rate cut anytime soon, but the statement could entrench that belief or give some hope to the contrary. Regardless, it could easily shake our market from its sidewards stupor.
On Thursday morning at roughly 6:00am (AEDT), the Fed will also have an interest rate decision. It seems likely the main reason for our market’s disconnect with the U.S is that they have likely been pricing in an expected cut. Our market has had no such hope. Their cash rate is expected to drop 25 basis points from 4% to 3.75%. Because it is likely already priced in however, they too instead will be looking for further hope in the Fed’s future guidance. If they don’t get any, it wouldn’t be surprising to see some selling.
Finally, we will finish the week with local employment data on Thursday at 11:30am (AEDT). Unemployment is expected to increase from 4.3% to 4.4% – a welcome increase for the market that continues to hope for another dose of rate cuts. If employment data is however stronger than expected, our market will likely not be happy.
US Markets
US shares closed moderately higher on Friday, though the gains were somewhat subdued. Prices did initially trade notably higher but they pulled back late in the session to finish only slightly in the green. It was again technology and other growth stocks that saw most of the buying, with the rest of the market more negative. The subdued movement was despite lower than expected US PCE price data (inflation data), which will cement a rate cut from the Federal Reserve on Wednesday this week. However, I think the market is starting to understand that this could be one of the last cuts this cycle. Additionally, prices are also looking very expensive, and outside of a few key sectors, the US economy isn’t looking very good. As a result, don’t be surprised to see buying a little constrained here. Whether or not US shares can continued towards fresh all-time highs will now likely depend on whether the FED signals further rate cuts next year at their Wednesday meeting. Should the be a bit more hawkish moving forwards, we could see a period of selling.
Five of the eleven sector groups of the SP500 closed higher on Friday, with Communications and Technology the best performers. Utilities and Energy stocks saw the most selling.
Technically, the SP500 push a little higher on Friday but wasn’t able to show a bullish entry signal. Instead the index reversed after reaching roughly 6,900, right around the all-time high resistance. Overall the index remains on an uptrend so we would assume that this level will break and further highs will be set. However, we won’t preempt it, and instead we will wait to see if it breaks, or if we see a bearish hold. Should we see a bearish signal from here, we should see a move back towards 6,750. The stochastic is also looking quite overbought, indicating gains are likely to be constrained and that we might soon see a pullback.
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