The XJO yesterday closed slightly higher after a very whippy session, pushing closer to the key 6,550 resistance level. At this stage, we consolidating between 6,550 and 6,400, it is hard to have much of a view until one of these levels break. If 6,400 breaks, we will reconfirm the downtrend with target around 6,200 and the 200 day MA, which is also the 10% correction level. If the market breaks 6,550, then things will be looking a bit more bullish. The futures today are suggesting strong open which will have us testing the resistance at 6,550.
US markets jumped higher, The Dow closed 326.15 points higher (1.25%) and the S&P 500 was up 36.64 points (1.27%). Most European markets closed higher, whilst the Asian markets were fairly mixed.
The S&P 500 jumped after China signaled they prefer not to escalate the trade dispute with the US by introducing more tariffs, but would prefer the approach the dispute in a calm manner. The index came up to test the resistance at 2,940 overnight as they continue to buy the market up ahead of US Labor day Monday. Technically the S&P 500 has formed a channel pattern between 2,840 and 2,940. Until we see a break of either one of those levels it is hard to have a view on the market.
Markets will be looking for any further hint of escalation and whether China will further retaliate against the US in the coming months. The 2-year and 10-year US bonds inverted further indicating a recession could be on its way in the next few years. Otherwise all eyes on the FED on the 18th of September, most analysts are expecting another rate cut but the question is how much?
What we know on the Trade War-
- China introduced further tariffs on $75 billion worth of U.S. goods, including autos.
- Trump then retaliated raising existing tariffs on $250 billion worth of Chinese goods to 30% from 25% starting in October. He also raised tariffs from 10% to 15% on another $300 billion of Chinese goods. Some of those tariffs will start on Sept. 1 while others have been delayed until Dec. 15.
- China discredited Donald Trump’s comments that he received a phone call from China and that they are coming back to the negotiation table. China in the past has walked away from negotiations saying that they will not negotiate under the pressure of US tariffs.
- China is making moves to help them become less reliant on exports by stimulating their local economy.
- China indicated overnight that they would prefer to approach the trade war in a more calm manner.
XJO Implied Volatility fell 3.80% and closed at 14.783%. The US volatility fell 13.59% and closed at 17.88%.
Crude was up again overnight but is consolidating between $60US and $50US a barrel.
Gold is rising strongly with economic concerns rising.
Iron Ore seems to have settled for the moment after having a strong pullback.
The Aussie dollar is consolidating around 67.50 US cents.
Seasonally it is common to see the market rise into the end of August, but then to pull back in September. This year could be very different considering that we have already fallen so much in the past month. At this stage, we can see IV is still high, indicating traders are still on edge. We are waiting to see if this market will break out of the channel and in which direction before taking a view on direction. Tuesday – Wednesday next week keep a close eye on the market as we will have the RBA and perhaps a reaction to the next tariff deadline on the 1st of September. Keep in mind US markets will be closed Monday night for Labour Day.