The XJO is expected to open flat this morning following a fairly indecisive night in the U.S. Their market tried breaking through resistance but ended up shedding intraday gains to finish flat. Their futures are also providing little lead.
Yesterday our market managed to continue the previous day’s break of the ascending triangle. Our opening gains were bolstered by GDP numbers released at 11:30am (AEST). QoQ our market contracted from 0.6% to 0.2%, a large miss from the expected 0.4%. Though this could mean we are moving towards recession at a quicker pace than anticipated, the market is too excited by the prospect of interest rate cuts. We have already had two this year, and it is thought the RBA will pause in the next announcement. With the poor GDP reading however, its another step closer to another cut sooner rather than later. Of course, in the long run, in theory, recessions are bad for markets… But the market is only looking at what is right in front of it for the time being.
We near all time highs, being less than one per cent away. It seems likely we reach it. However, the past couple of day’s strength is outside our short-term volatility range which should translate to sidewards movement or a marginal pullback before we do.
If we manage to make fresh all-time highs a pullback should be imminent. Very rarely does our market make consecutive fresh all-time highs. The pullback typically happens the very next day, or within a handful of days of consolidation. Considering the current environment, it seems very likely we see the same this time around.
We continue to expect the ascending channel to hold. With 8,450 breaking, we should expect that to now be key support. The uptrend line comes in at similar levels. Resistance is somewhere around here as we are practically at all-time highs. The stochastic are back in overbought territory. Coupled with our spike in volatility over the past couple of sessions, and little leads from the U.S, sidewards movement or a pullback seems warranted. Don’t be surprised to see our market in the red today.
US Markets
US shares closed flat overnight, with prices initially trading higher before pulling back towards Tuesday’s closing levels. US markets were perhaps slowed by a report showing fewer jobs were created than expected in May, though we won’t know the full picture until the full unemployment report is released on Friday night. US markets do look overdone on the upwards move, especially given the strong risk of economic slowdown and perhaps recession. In addition, the FED have been signalling that they can’t backstop the market here, while most in the market continue to assume that they can. The FED’s issues include the risk of inflation (stagflation) and the rising longer-term US government bond yields due to US government debt concerns. Still, momentum remains to the upside and until a violent break of this momentum, we have to assume a continued grind higher.
Six of the eleven sector groups of the SP500 closed higher overnight, with Communications the strongest performer. Utilities and Energy stocks saw the most selling, while most sectors were fairly flat.
Technically, the SP500 has rallied to the first target, which is last week’s peak at ruoghly 5,975. The index has stalled at this level for the past week or so and was again unable to break above this level overnight. This level would need to break above for further gains to look likely. Should that level break, the next target is 6,000, which isn’t too far away. The index would need to break below its uptrend line to look bearish.
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