US shares fall back to the trend line, XJO to drift lower

The XJO is expected to open flat this morning despite a strong pullback in the U.S overnight.

Yesterday we pulled back to form an evening star reversal pattern. We also led the U.S, who followed us lower overnight, however their move was far more exaggerated. Our mute response to their pullback overnight, aside from us leading them yesterday, could be explained by both the fact that we have not rallied as aggressively as they have in the recent bull run, and their mildly positive futures this morning. Furthermore, much of their selling was across tech, which is less represented in our market.

Regardless, we are set to test the recent all-time high level we broke on Friday at roughly 7,700. This level should now act as a support level and should hold provided we remain in a low volatility environment.

Today we have local GDP data, which is meant to remain sticky at 0.2% (MoM), but about 30% lower than the same time last year at 1.4%. This arguably shows the effect of the tightening cycle we are coming out of. We should largely expect it to be a non-even directly.

Tonight, we have Powell testifying, so it will be interesting to see how market digest his comments. Ultimately it feels like cracks are starting to show in a severely overbought U.S market. It would make sense to see some mean reversion and profit taking extend losses lower, but when, or what triggers it is hard to know. Perhaps it will be Powell that does it, but the market has lately ignored any caution from the Fed, so they may simply shake it off again.

US Markets

Each of the three major US indices closed lower overnight, with selling concentrated in technology shares. US shares continued to fall from their all-time high levels with profit taking more so than any notable negative factors. Overnight US PMI data was fairly mixed, with stronger than expected Services PMI but weaker than expected factory orders. Overall the data pointed to continued US economic strength, which may be somewhat inflationary. Tonight and tomorrow night we will see Fed Chair Jerome Powell testify to US Congress and he is expected to comment on the battle with inflation, which will help the market become more confident on the timing of rate cuts in 2024. Most are expecting the cuts to now come in June, but this expectation could be pushed out if Powell is hawkish and data continues to come in strong.

Only three of the eleven sector groups of the SP500 closed higher overnight, with Energy the strongest performer. Technology Stocks saw the most selling, followed by Real Estate, Discretionary, and Industrials stocks.

Technically, the SP500 fell back towards the uptrend line overnight but it held above this key level. The index may be showing an evening star candlestick reversal signal up the top of the range here, but it would have to close below the uptrend line (currently sitting around 5,050) to confirm this bearish reversal pattern. Should it bounce from the trend line the recent peak around 5,130 would be the upside target.

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