The XJO is expected to edge higher on open despite the U.S closing flat on Friday and their futures edging into the red this morning.

On Friday we tested the previous resistance at roughly 7,280 and rebounded from it intraday to finish only marginally lower. Coupled with our expected gains (albeit meek) on open, our market is showing an uncharacteristic resilience in the face of high inflation and the high interest rate environment. Indeed, it is curios that we did not commit to further selling following the strong local employment data reported on Thursday last week. Strong economic data in this rate cycle environment would typically be seen as bearish for our market as it entrenches the belief of further rate rises and an extended hiking cycle.

However, it is likely that much of our bravado is driven by the U.S not willing to commit to too much selling despite being clearly overbought. They instead have been consolidating at the top of the range. Their bullishness is however backed by poor economic data which in turn reinforces the belief that peak rates is just around the corner for them.

On Wednesday at 11:30am (AEST) the latest CPI reading will be released locally. This is of course as important as a data release gets. Expect our market to move on the back of it. Our market is trading near the top of the range, and therefore has a higher base to fall than to rally from. If CPI comes in lower than expected (5.4%) like it did last time, expect the bulls to be vindicated and for our market to push higher and possibly make monthly highs (provided the U.S doesn’t have a decent selldown at the time). If however it comes in higher than expected then our market should fall (unless the U.S continues to charge higher). If it comes in as expected, then its hard to know how the market will react, but it would be hard to expect our market to push through the top of the recent trading range without further gains from the U.S, and again the U.S is due for some proper profit taking.

Ultimately, our market is split between our local interest rate environment and how the U.S trades. If they counterbalance each other our market tends to travel sidewards. Indeed, we can look to the past few months as evidence of this in that our market has been tracking in a broad channel whilst the U.S has quite clearly trended higher and higher.

The channel’s range is roughly between 7,380 to 7,400, and 7,000 to 7,100. Channels are imperfect in nature and the peaks and troughs can be sporadic and at slightly different levels. On Thursday we tested the top of the channel intraday and pulled back (thanks to the strong employment data locally). For the past week we have skirted along the previous resistance at 7,280 which marks the first level of support. If this breaks, we should expect a move back to roughly 7,200 to 7,150 as this is where the 50, 100 and 200 day MAs are roughly converging and seen as a comfort level of our market in the short-term. The stochastic are looking heavily overbought, have crossed and are pointing down.

It’s important to remember that in times when markets are moving fundamentally (like on the back of a CPI release) that even though we can ignore broader technical signals, we are still likely to move to and hold key levels of support and resistance. If for example we break higher on Wednesday, we would look to 7,450 and then 7,500 roughly as the next targets in the short-term.

Outside the CPI reading, we have U.S consumer confidence numbers early Wednesday morning (before market open). U.S Building permits, new home sales, and most importantly the Fed interest rate decision Wednesday night. The ECB interest rate decision and U.S GDP Thursday night. And to finish off the pivotal week, local retail sales and PPI numbers on Friday with U.S PCE data Friday night.

From Wednesday onwards markets could be very volatile.

US Markets

US shares closed relatively flat on Friday, with little change across the three major indices. Prices initially traded higher but pulled back throughout the session as investors sold in the final few hours of trade. There was a lack of company earnings or economic reports on Friday, though American Express fell after missing revenue projections. This week will see US earnings reports continue, but perhaps the most important event will be the Federal Reserve meeting, which is expected to see a lift in US interest rates. This meeting will conclude on Wednesday night Australian time. Overall, US shares have enjoyed strong bullish movement for the past three months, but this movement may be starting to stall. Keep an eye on the potential for a reversal around reporting or the interest rate rise.

Seven of the eleven sector groups of the SP500 closed higher on Friday, with Utilities stocks the strongest performers, followed by Healthcare and Energy stocks. Most other sectors were relatively flat.

Technically the SP500 is continuing on its uptrend and now the next potential resistance level is some way away at the 4,600 level. This level hasn’t been reached in over a year, so its hard to say whether this will be the resistance level or not. Should the index fall from here, recent resistance at 4,450 may now act as support.

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