The XJO is expected to open lower this morning following a strong pullback in the U.S on Friday.

As of writing, our futures have us retreating once again to the comfort of the convergence of the key moving averages, which come in at roughly 7,250. U.S futures are mildly in the green, which at least indicates that their selling on Friday isn’t compounding. They remained in their sideward consolidation, and their positive futures hopefully indicate that isn’t changing.

On Friday we had a strong session, though rebounded off key resistance near 7,300 and pulled back intraday to give up some of the gains. There also may be a short-term downtrend line that we rebounded off on Friday, but it is still somewhat tentative.

Ultimately, our market continues to trade range bound, like the U.S, though with a lot more volatility. It does seem however that the peaks and troughs are being squeezed like a broad pennant pattern. Back in July, the bottom of the range was 7,100 to 7,000, which was followed by a peak of roughly 7,475. The next trough was roughly 7,100 in August, followed be a peak of roughly 7,340 at the start of the month. Finally, the most recent trough from last week was roughly 7,140, and on Friday we got to 7,320. These numbers are rough, but it seems like we are wanting to spend less time away from the key moving averages and less committed to bull or bear runs.

If falls persist, then 7,200 to 7,150 are the next key levels of support. If further rallies are on the book, which seems less likely, then we would need to get through roughly 7,300 to 7,350 resistance, and possibly a small downtrend line. Even though the status quo is being range bound, it will eventually change. Markets will trend again. We will likely need to see a catalyst, or compounding of catalysts to achieve this. Typically, this has revolved around key economic data points like unemployment, GDP, retail spending etc, and more importantly, CPI and monetary policy.

Future guidance on monetary policy for the Fed, RBA, and even the ECB have largely been ‘data-dependent’. Central banks are trying to achieve a “soft-landing” for the economy, where inflation declines, but the global economy doesn’t overcorrect into a devastating recession. This would be a tremendous achievement.

And looks to be working. The global economy is in decline. Recently, central banks have taken their foot of the gas, and it is largely believed we are reaching peak rates – though there may be one (dare we say two) more climbs to come before the year is out. However, even though we are nearing peak rates, it is becoming clearer that rates will need to be higher for longer, as some of the key economic data points are remaining resilient. For example, locally, we are still at full employment, though we are seeing an increase in underemployment. Recently in the U.S, their core CPI came in slightly higher than expected. Oil has recently had a run higher. Even though central banks are wrangling inflation and bringing it under control, it is a slower process which would only be accelerated by a more aggressive tightening policy – which would increase the risk of overcorrecting, volatility, and a harsher recession. This meek malaise seems responsible for our range bound market, and a consolidating U.S – which is typically a far more a trending market.

Markets will be looking at RBA minutes tomorrow, and more importantly, the U.S Fed interest rate decision Wednesday night.

US Markets

US shares closed firmly lower on Friday, with each of the three major indices finishing in the red and reversing the gains of the prior two sessions. The movement came with a bit of economic uncertainty from US investors, who aren’t too sure if interest rates are peaking and that the economy will cool from here, or if further interest rate rises are to come. Those who think the economy is cooling are also split into two camps, those who view a soft economic landing as likely, and those who think the slowdown will result in a heavy recession. With this uncertainty going on, markets have been quite volatile back and forth. Though US markets fell fairly strongly on Friday, they mostly held above support levels, so we will need to see if they can rebound from these levels this week.

All eleven sectors of the SP500 closed lower on Friday, with Technology and Discretionary stocks the weakest performers.

Technically, the SP500 returned to the 4,450 support level on Friday, we now need to see if this level holds before confirming a technical view. Should the index fall from here, it would record three lower peaks and we could consider it to be down trending. Should 4,450 break, we could see a fall back to 4,350.

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.