Flat open expected after last week’s craziness

The XJO is expected to edge lower on open this morning. The U.S on Friday continued their descent lower, however their futures are in the green.

Friday was, frankly, a weird day of trading. We opened the session over 100 points lower, however we had a very clear and aggressive intraday bounce to retake all the day’s losses to finish a few points in the green.

This does track with our overall view of the markets lately, which is simply that despite bearish pressure underpinning our market, it remains rangebound. This translates to a market that is willing to fall, but unwilling to break the bottom of the range at 6,900 to 7,000. Indeed, on Friday, we clearly bounced from clear support at 6,950.

It is, however, hard to know exactly why our market drove higher so aggressively intraday. It could be that the U.S weakness has been, in part, attributed to their looming government shutdown at the end of the month. Even though falls in the U.S flow into our market, perhaps we were unwilling to get to far ahead of ourselves, especially with how strong the supports are here at the bottom of the range. Regardless, it reinforces the sentiment that our market is happy being range bound, but prone to throwing volatile fits.

We need to be cautious around here. The U.S has broken and held below their 100 day MA, and 4,200 and the 200 day MA is a not an unreasonable target if selling persists. The government shutdown may continue to cause selling, especially considering the week is relatively quiet on the inflation and monetary policy front. This would translate to our market retesting the bottom of the range. Although a small relief rally isn’t unreasonable or even unlikely in the short-term, it would seem more likely that we simply consolidate (albeit perhaps in a volatile whipsaw fashion) around these levels. 7,100, 7,150, and 7,200 are the key levels of resistance our market is likely to listen if we do see strength beyond this level.

In the week ahead, we have local August CPI revision on Wednesday. If volatility doesn’t leave markets this week, this could translate to movement in our market. On Tuesday night, we have U.S consumer confidence. On Thursday we have local retail sales numbers, and on Thursday night we have U.S GDP data, and Powell speaking. To finish the week, we have Chinese Manufacturing and Services PMI on Friday, and U.S PCE data Friday night. As always, we want to see weaker economic data locally and from the U.S.

US Markets

US shares closed on Friday, with each of the three major indices finishing slightly in the red. Prices spent most of the session trading in the green, but late selling saw the close in the red at the daily lows. There was a lack of major US economic data, so prices instead continued with their recent bearish movement, which was triggered by last week’s Federal Reserve meeting. The Fed suggested a possibility of another rate rise, as well as the likelihood that rates would stay higher for longer. This has triggered a rethink of the bullish move that US shares enjoyed earlier this year, which was built on the back of a belief in peak interest rates. US investors will now be left scratching their heads with a hope that data starts to weaken from here, and that the economy starts to slow – while this might sound a bit counterintuitive, it is likely what will be necessary to stop the crazy pace of interest rate rises. The other major concern for US investors is a pending government shutdown, with US lawmakers unable to agree to funding bills, these shutdowns are a semiregular occurrence so its hard to say if this will have a serious effect on markets.

Nine of the eleven sector groups of the SP500 closed lower on Friday, with only Technology and Energy managing to record gains. Discretionary and Financials stocks saw the most selling.

Technically the SP500 has broken below several key levels of supports, including 4,450 and 4,350. The index is now setting lower peaks and troughs in the short-term, suggesting it may keep falling. The index did also close slightly below the next level of support at 4,330, which suggests that unless the index can tick back above this level tonight, there is plenty of room to the downside, with eventual downside targets around 4,200.

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