The XJO is expected to open lower this morning following another night of selling in the U.S on Friday. Their futures are also slightly in the red.
Our market fell to key support at roughly 6,900 on Friday and held. This level is roughly our yearly lows and represent the bottom of the broad trading range. Today, we are set to break it. And even though this would typically be a strong bearish signal, it may not be this time. There are a couple of reasons for this: Firstly, the U.S has just tested and held their equivalent key support at roughly 4,200. They are also holding near the 200 day MA. This means that our market has (frustratingly, and in a rather dramatic fashion) broken lower without the U.S doing so first. If the U.S holds, and rebounds from here, our market could easily retake much of the expected opening losses and return sheepishly to 6,900. We may even see the beginning of this today if U.S futures turn around and herald the rebound tonight. This would also continue our downtrend with our market creating a lower trough. Secondly, the next key support is at roughly 6,800, which seems likely we test today. In fairness, this is a historic support, a level we haven’t really tested in almost a year. However, our market may be reluctant breaking it with the U.S clearly holding 4,200.
Markets are worried about the conflict in Israel escalating, and a Fed that is signalling a rate rise, or by the very least, entrenching a “higher-for-longer” stance. This isn’t really that new, or to be unexpected, but commentary around the space is pointing to a Fed that lacks direction, and markets don’t like uncertainty. This will, as it has, continue to develop as more key economic data is released.
In the week ahead, we have local manufacturing and services PMI tomorrow morning, and the U.S’s tomorrow night. On Wednesday we have a local CPI reading, which is the biggest event for our market this week. On Thursday morning, Powell will speak, and on Thursday night the U.S has GDP data. On Friday we have local PPI, and the U.S Friday night have a PCE update.
Ultimately, local CPI Wednesday, U.S GDP Thursday, and Powells speech Thursday are likely to be the biggest movers.
US Markets
US shares closed firmly lower again on Friday as each of the three major indices again saw notable selling. Markets are facing numerous negative factors at the moment, with worries around middle-eastern conflict and seemingly an increased chance of further US rate rises. With regards to the middle-east conflict, many investors are expecting an invasion of Gaza by Israeli forces to occur soon, which could trigger additional selling. There is also a worry that Iran might become further involved in the conflict, which would also not be good for markets. This will be a fairly quiet week for US economic until Thursday’s GDP report. Momentum definitely remains to the downside in US markets, but they have largely come back to key, multi-month low support levels. While there is a fair chance we see further downwards movement, don’t be surprised to first see a bit of a breather after a four-day downwards movement with fairly strong selling.
Every major sector of the SP500 closed lower on Friday, with Energy stocks the worst performers, followed by Technology and Discretionary stocks. Consumer Staples and Healthcare stocks saw the least selling.
Technically, the SP500 fell back to the support level at 4,220 on Friday. This is the lowest support since the market broke higher in June of this year. The market is definitely seeing downwards momentum and it did set a lower peak in early October, indicating we could see a lower trough. However, after four days of strong falls, don’t be surprised to see a bit of a breather at this level first. Should 4,220 break, the next level to the downside would be roughly 4,170. Should we see a rebound from here, 4,330 is likely to act as resistance.
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Advisor at TradersCircle and Emerald Financial
Joining the team at TradersCircle in 2011, Karo has extensive experience in both investing education and derivatives trading.
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