The XJO is expected to once again open higher this morning , following one of the strongest rallies we have seen in the past year from the U.S on Friday night. Their market clearly rebounded off both key support at 4,200 and the 200 day MA, and broke the short-term downtrend line. The upswell of confidence their positivity has instilled in our market has been faltered by the war in Israel however, with our expected open near 7,000.

U.S jobs data, albeit mixed, pointed to a slightly higher than expected unemployment rate. This obviously flows into the inflation and monetary policy narrative that has been driving markets for at least the past year. It could also be interpreted as a sort of goldilocks reading, where some of the data was positive, but wholistically, indicating that we are seeing a cooling off in the jobs data from the U.S. This implies that there will be less of a need for further rate rises, whilst at the same time perhaps achieving a “soft-landing”. It’s basically what their market needed to justify a rally from key levels following almost a month of selling.

Their positivity should translate to a break of our own downtrend line, and a continuation of the rebound from key support at 6,900. These moves vindicate our belief that we would hold our lows, despite the bearish sentiment underpinning our market the past few weeks. 6,900 represents roughly our yearly lows, and the bottom of the broader channel our market has been trading in since roughly November last year.

Our expected open near 7,000 is a resistance level. U.S futures have gone from being in the green this morning, to harshly in the red, likely due to escalation in Israel. We should expect the rally to be short lived today unless U.S futures turn around.

We need to be mindful that broadly speaking, bearish sentiment likely still underpins markets (perhaps now returning with gusto). The global economy is not out of the woods. Inflation concerns remain very real, and with war sparking in Israel, we should expect higher oil prices to exacerbate the situation. Higher-for-longer rates are still very much the status quo markets have been adjusting to over the past few weeks, and there is a strong argument that we have not finished pricing that in. Despite the jobs reading last week in the U.S, there is still a good reason to believe that both locally and the U.S should expect another rate rise before the year is out.

This could translate broadly to either a bull trap, or, more sidewards markets. Remember, downtrends are characterised by lower peaks and troughs. We could simply be seeing a shallowing of the downtrend, with our market retesting 6,900 in the coming weeks. Alternatively, we could see the positivity drive us back to our moving averages at roughly 7,200 to 7,250. Regardless, we cannot with any confidence say that this is the turning point for our market and traders need to continue being defensive.

It will, of course, come down to how the inflation and monetary policy environment continues to evolve – which itself, hinges on key economic data. In the week ahead, we have local consumer and business confidence. On Wednesday night the U.S will update PPI numbers and the FOMC will release their last meeting’s minutes. On Thursday night the U.S has a CPI reading. Finally, on Friday we have Chinese CPI and PPI numbers. Obviously, the U.S CPI reading is the big announcement. CPI data from the U.S is the penultimate data release. From Tuesday different Fed members will speak leading into the announcement and the release of the FOMC minutes. Don’t be surprised if see indecisive trading tomorrow, Wednesday and Thursday leading into the CPI reading.

The wild card on the table is how the U.S market will react to the war in Israel. This morning, the U.S looked like it was not pricing in the war, but with their futures suddenly turned strongly red. We will need to wait and see.

US Markets

US shares jumped strongly higher on Friday after the September unemployment report showed an unexpected rise in the unemployment rate. This is what share investors want to see at the moment, because it is seen as decreasing the chance of another US rate rise. US markets aren’t out of the woods just yet however, and this week will hold a lot more data and events that will influence the next directional movement. These include the quarterly company earnings reporting season, which kicks off in earnest on Wednesday, as well as the big one; the US CPI reading (inflation) for September, this reading will be used as a gauge to see if inflation is coming under control or not, and will be the major basis as to whether the US Federal Reserve raises rate again at their meeting on the 1st of November. Still, in the short-term, Friday’s unemployment report could trigger some bullish movement as it could be seen as inflation related data heading in the right direction.

Ten of the eleven sector groups of the SP500 closed higher on Friday, with only consumer staples closing lower. Technology, Utilities, and Communications stocks were the strongest performers, while most other sectors closed notably higher.

Technically, the SP500 has bounced the support levels at 4,250, with a strong bullish bar on Friday. The index is showing potential signs of bouncing from here, but there are levels that could act as resistance against an upside move. The most important of these is the 4,330-4,350 level, should that level break, we are likely to see a further jump to the upside.

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.