The XJO is expected to open lower this morning following a small pullback from the U.S on Friday.

We may retest 7,000 this morning, which we almost bounced from intraday on Friday, and has historically been a key level of support. This will break the short-term uptrend line that had formed over the course of the recent rally. Short-term technical indicators like the stochastic put our market in overbought territory, and the pullback on Friday helped indicated a change in direction.

Profit taking in this environment after a strong rally was to be expected. Furthermore, it also seems that negativity still underpins markets, and that what we saw last week was a relief rally after bouncing from yearly lows. Indeed, we need to remember the market is still likely trading in a broader downtrend.

Markets are still tentative and adjusting to the ‘higher-for-longer’ future guidance for monetary policy, as well as the fact there may be one more rate rise before we hit peak interest rates. Certainly, the conflict in Israel is unnerving, both from a humanitarian perspective, but also from a broader market perspective. Rising oil prices are inherently inflationary, and if the conflict escalates further or draws out for an extended period, then oil prices are likely to remain elevated.

In the short to medium term, markets are likely to remain sensitive to news, with not needing strong reasons to fall. With the U.S reporting season starting, by the end of the week they will have a decent update to health of some of their largest listed businesses. In addition, local and U.S central bank members will speak throughout the week, with Powell talking on Friday night. There is U.S retails sales Tuesday night and local unemployment numbers on Thursday.

If the U.S resumes its selling in a meaningful way, our market will of course selldown with it. However, we have shown a strong willingness to hold 6,900 in the face of the negativity underpinning markets. We can probably bare some decent selling in the U.S before that level cracks, so it will come down to the severity of the selldown. Otherwise, if company reporting is rosy, and news is innocuous, markets could track sideward to higher, in which case 7,100 and 7,150 are our next targets of resistance.

US Markets

US shares closed mostly lower on Friday, with the Tech-heavy NASDAQ falling strongly, while the DOW JONES closed slightly higher. The broad-based SP500 closed moderately lower. There was a lack of major US economic data on Friday, though a report did show that consumer inflation expectations are rising and that consumer sentiment is falling. Markets were nervous with Israel expected to invade Gaza over the weekend, though it appears that this didn’t occur. Oil and gold prices jumped strongly on these expectations and trading in shares was tepid. This week will be mostly about US company earnings reporting, which started late last week. Friday’s earnings reports were mostly positive, with JPMorgan, Citigroup, Wells Fargo, United Health and other big names beating earnings expectations, while fund manager Black Rock fell after a disappointing revenue result.

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

Technically, the SP500 has stalled at some resistance around 4,385. The index is potentially now forming a lower peak and could head back towards recent lows around 4,220-4,240 index points. However, should it reverse higher and close above 4,385, we could see a move back to 4,440.

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