The XJO is expected to edge higher on open this morning following a strong move up in the U.S on Friday. Their futures are in the red this morning which may help explain our relative muted open despite their renewed confidence on Friday.

We should retest 7,000 open, a level of resistance our market has been hanging around since it started consolidating last week. 7,050 marks the recent high, which is also where the 50 day MA comes in. Any further strength today will likely fail there unless U.S futures undergo a large upswell.

Markets look overbought by short-term indicators, and we would expect profit taking to come in soon. Overall though, by more medium to longer-term indicators, markets broadly remain somewhat oversold or steady. For example, the stochastic are quite clearly in the overbought area, however, markets remain near their 50 day MA, but below their 100 and 200 day MAs.

The week ahead is packed with key economic data, both locally and in the U.S, which could be the catalyst our market is looking for to break the consolidation range. The U.S broke their own consolidation range on Friday, however it would be surprising to see them get too far ahead of themselves prior to the CPI reading on Tuesday night.

Also on Tuesday, we have local consumer and business confidence numbers. On Wednesday we have Chinese industrial production and unemployment data, and local wage price index numbers. On Wednesday night, the U.S has PPI and retail sales numbers. On Thursday we have local unemployment data.

The recent run higher has largely been built on markets expecting that both the Fed and the RBA have finished their tightening cycle. However, if the slew of data this week doesn’t point to cooling economies and CPI, then it could all end in tears as the market has a sober moment of realization that rate rises may indeed be back in the table.

US Markets

US shares rocketed higher on Friday, with each of the three major indices seeing serious gains. US indices look to have broken above their downtrend lines with the strong buying on Friday, which could point to further gains. Recent strength in shares has come from the Federal Reserve and the bond market, with investors now assuming that US interest rates will rise no further, and that the next rate move for the US will be an eventual rate cut. Markets held this view on Friday despite a reading showing that inflation expectations rose in November. The next major test for the peak rate view will come on Tuesday night with the release of US CPI (inflation) data. Investors will want to ensure that CPI growth is continuing to slow, otherwise we could see strong selling in US markets.

Every major sector of the SP500 closed higher on Friday, with the growth sectors of Technology, Communications, and Discretionary faring the best. All other sectors did see decent buying however.

Technically, the SP500 broke above the medium-term downtrend line that has formed since the July peak. This break of trend is also a higher peak for the index and could be setting the stage for a change in trend. The index does look overbought in the short-term however, so some profit taking should be expected. The first potential resistance level to the upside is around 4,450 index points, while 4,385 may act as support on a pullback move.

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