The XJO is expected to edge higher on open this morning following another tumultuous session in the U.S on Friday which saw their market pull back from their intraday highs to finish slightly in the red. Their futures are mildly green.

We finished last week particularly gloomy. Both Thursday and Friday were big days of selling. Negative sentiment around monetary policy and economic growth have underpinned our sidewards to bearish market over the past couple of months. It seems likely that one of the few reasons we had managed to hold a channel lately is because in contrast the U.S was making new highs and uptrending. Now, with the U.S clearly rebounding from resistance and showing indecision, our market has one less thing to be confident about in the short-term.

Last week the RBA decided to hold rates. This led to short-sighted gains as the initial sugar hit caused our market to return to key resistance. However, the reality soon set in that the rate hike cycle is likely now extended. Coupled with a pullback in the U.S, it was not too surprising to see our market break lower on Friday.

We fell through key support at roughly 7,075 to 7,050 which represents the floor of the recent channel. This morning, we are expected to open near 7,075. This could mean we are going to sheepishly return to trading within the channel, meaning Friday’s move was an overreaction and a false break, or we are going to use 7,075 as a resistance to test before continuing our decent. How the U.S trades will likely affect this outcome. It’s worth noting that despite the U.S rebounding from resistance and being indecisive, they are likely still holding an accelerated uptrend line. Furthermore, there is plenty of support around here. Indeed, pretty much every 50 point increment from here to 6,900 is a key level our market has used in recent history as a solid support.

Don’t be surprised if we see a relief rally soon. Lately we have seen some a couple of decent runs as volatility returns to our market – albeit they have been met with aggressive selling. We are once again forming lower peaks and troughs, and relief runs are an ingredient of a downtrend. Furthermore, we are entering oversold territory in the short and medium term when considering the 50 and 100 day MA. We are also below the 200 day MA. Our market has not wanted to spend too much time away from these averages in recent trading, giving another good reason for some relief to come in soon.

Overall, despite the doom and gloom, and the apparent downtrend our market looks to be forming, if the U.S can hold our market has a few good reasons to see some buying soon. However, we may be set for some meek consolidation or even further selling back down to around 7,000 before we get relief.

In the week ahead: we have Chinese CPI and PPI this morning and local building approvals. Tomorrow, we have local Westpac consumer confidence and NAB business confidence numbers. On Wednesday we have a NZ interest rate decision, and U.S CPI Wednesday night. On Thursday afternoon we have U.K GDP numbers. The most important news out this week is no doubt U.S CPI. We could very well continue to see the U.S remain sidewards until these numbers, causing our market to consolidate as well.

US Markets

US shares closed moderately lower on Friday, with prices continuing to drift off multi-month high levels. It comes after a mixed bag of US economic data, as the US jobs report came in roughly in-line with expectations. Unemployment fell as expected, and wages rose, both of which are inflationary signals, though there were fewer jobs created than expected, which perhaps shows slightly more weakness in the jobs market than headline employment suggests. Overall western markets are being dominated by the inflation and interest rate balancing act, and we will get an update on this from the US on Wednesday with the release of June CPI. We will also see US second quarter earnings start to be announced this week, which is expected to show a 9 percent year-on-year earnings decline for the SP500. Later this month we will see a US interest rate decision, with most economists predicting another 25 basis point rise.

Six of the eleven sector groups of the SP500 closed lower on Friday, with Staples and Healthcare the worst performers. Energy stocks fared best after a big jump in oil prices.

Technically, the SP500 has held below the key resistance at 4,450 and looks like heading back towards the recently broken resistance of 4,300, which could act as support against a downside move. This level is also roughly where the uptrend line sits, which could also act as support. Should the index rise from here, the recent resistance level at 4,450 would have to break before further gains look likely.

Want to learn how to trade?

The team at TradersCircle/Emerald Financial have released a free online stock market education course, click here to enrol and get started.