The XJO is expected to open higher this morning, near 7,850 at time of writing.
The U.S finished slightly higher on Friday night, giving our market confidence to extend Friday’s gains.
We are clearly bouncing off key support at 7,650, and should face resistance on open from the key level at 7,850, but also the 50 day MA which comes in at similar levels. Considering our market was trapped in a broad range for most of this year, there are key levels of support and resistance arguably every 50 points from 7,500 to 8,050. With volatility still elevated, we will of course break these levels with any large moves we experience, but will typically finish on one of them. Indeed, our six percent fall had us virtually finish on 7,650 and within arms reach of the 200 day MA.
The question of course, is whether this is a dead cat bounce before continued falls, or the beginning of a move back towards our highs. And of course, the answer is hard to determine as there is fair argument for both sides.
It would be reasonable to suggest that market sentiment has not simply turned on a dime, and that the pump the U.S has seen since October did not suddenly wash away (on no real trigger either). Furthermore, the U.S has corrected by falling ten per cent since their all-time highs. Corrections are healthy mean reversions that can strengthen underlying bull markets. Our market did not “correct” but we are clearly following the U.S closely for now.
The levels we have fallen to are key levels, near the bottom of the dominant trading range we experienced for most this year. We all but touched the 200 day MA, a healthy longer-term mean reversion. As of this morning’s expected open, we are also considered neither overbought nor oversold in the short or medium term as we should be trading near both the 50 and 100 day MA.
Finally, it could be that the U.S selldown was simply a message to the Fed that they better stick to their cut for September. It is also likely signalling to the Fed that their next couple of meetings should be more dovish, with an indication that they may get another cut this year. It wouldn’t be the first time the market has held itself hostage to influence the Fed.
On the other hand, markets have been overheated for arguably months. Our market is likely still overheated when we step back and look at the forest. We are heading full steam into a reporting season this week, and for the next few weeks key companies that shape our index will be trying to justify their share prices. Some will fail. CBA is reporting on Wednesday, and it will be interesting to see if the market still believes they deserve to be trading at these levels once their numbers are released. If CBA falls, it should flow into the rest of the banks, and by extension, into the index.
In the same league, macroeconomic data remains the key focus for markets, and have often been trigger points for volatility.
In essence, even though there is good reason to believe the falls have concluded, company reporting and key macro data could renew the selling if markets don’t find them favourable or even favourable enough to justify these prices.
In the week ahead the big news is U.S CPI Wednesday night, and local employment data on Thursday. Aside from that, the U.S has retail sales numbers on Thursday night.
There are plenty of companies reporting this week, but arguably the most notable are CSL on Tuesday and CBA on Wednesday. This is a good time to start looking at strangles/straddles – call the office for some suggestions if you would like help.
US Markets
US shares finished higher on Friday, with each of the three major indices finishing in the green. Prices opened slightly in the red and did trade back and forth before closing close to the daily peak. There was not a whole lot of news on Friday, and instead prices recovered from the recession concerns from the week before. This week will be all about CPI for US markets. The CPI reading is on Wednesday night and as long as it doesn’t rise from here, it should open the door for a Federal Reserve rate cut next month. An unexpected rise from CPI could disrupt the market however. Elsewhere on the data front, any data that points to an accelerated decline of economic activity or recession could trigger market volatility.
Ten of the eleven sector groups of the SP500 closed higher on Friday with Communications and Technology stocks the best performers. Most sectors saw moderate buying with no sector seeing notable selling.
Technically, on Friday the SP500 pushed through the potential resistance at 5,330 on Friday, which suggests further upwards movement. The index is still in an overall longer-term uptrend, but we can no longer draw a comfortable uptrend line. Instead, we must look at key support and resistance levels as potential targets. With a break of 5,330, the next target should be 5,400.
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