The XJO is expected to edge higher on open this morning following another indecisive night of trading in the U.S which saw their market continue to flirt with resistance and close fairly flat.
We should open near 7,500, in step with the sideward consolidation we have seen for all of last week. U.S futures are in the red, however they are closed tonight for Martin Luther King Jr. Day and so our market won’t likely feel comfortable making too much headway one way or the other today.
There has been a disconnection recently between our market and the U.S. They managed to move back towards their all-time high resistance level and grind along it. However, we lamented and tracked along support at roughly 7,480, waiting to see if the U.S can commit to a break higher.
Falling iron ore prices has also kept the breaks on our market. The miners are our second largest sector, many of which mine iron ore. Their falls has offset any gains we have seen in other sectors, like in the major banks.
It has been a lacklustre start to the new calendar year. Indeed, even the recent CPI reading from the U.S on Thursday last week did little to drive markets. In fairness, the data may still be under consideration, however it seems markets are still on the tail end of a vacation.
Economic data will continue to be a major contributor to market movement, as it will help markets home in their predictions of when rate cuts are on the table this year. Speculation for the U.S at this stage still sits between March, May, and June. With the recent CPI reading, March seems less likely now. Furthermore, at some point, bad economic data will once again be bad for the market, rather than the environment we have been in for the past few years where bad economic data has been good for markets. Historically, this has been when rate cuts start occurring, so that may be the case later this year. Markets are still running on hope that they can achieve the soft landing. If we get readings however that show the damage to the economy is too great for that to be achieved, that could be catalyst for the flip.
On a positive note, the recent consolidation is healthy for the broader underlying uptrend. The recent run up was in no way sustainable. We have broken the accelerations, and it looks like we are on track to meet the underlying uptrend line. The line comes in at roughly 7,375 to 7,400 at this stage. If we do see a pullback, this is the first target. However, we could also continue to track sideward until we meet it, which should take about a fortnight.
Even though the U.S is unwilling to break through, they certainly aren’t unwilling to turn off the music and go home, with each pullback being met with intraday buying. It seems likely that our market will only feel comfortable playing catch up if they manage to push through with conviction. In which case, we would see a return to our own all-time high resistance at roughly 7,630 and potentially sticking our head above it.
In the week ahead we have we have Chinese GDP on Wednesday, and UK and Eurozone CPI that night. Also Wednesday night we have U.S retail sales numbers. On Thursday we have local unemployment numbers which are expected to remain sticky around 3.9%.
US Markets
US shares closed flat on Friday, with prices fluctuating around resistance levels. US investors are now pricing in a 75% chance of a Federal Reserve rate cut in March, which looks extremely optimistic, given the fact that recent inflation data has come in stronger than expected, as has other economic data. We are also at the start of a US company earnings season, with most reporting companies, including most of the world’s largest banks, reporting slightly better than expected results; despite this, they mostly closed lower. US shares are continuing to fluctuate around their all-time high resistance levels, but recent data has been less supportive of a continued rally. We will need to wait and see if the next break is higher or lower. US markets will be closed tonight for a public holiday.
Seven of the eleven sector groups of the SP500 closed higher on Friday, with Energy stocks the best performers, followed by Real Estate stocks. Discretionary stocks were the worst performers.
Technically, the SP500 has stalled out around the all-time high resistance at 4,800 index points. That 4,800 level would be the mark to beat before further gains look likely. Should that level (or a slightly lower level) continue to hold, we could see a double-top pattern form, which would be a bearish sign for the index.
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Advisor at TradersCircle and Emerald Financial
Joining the team at TradersCircle in 2011, Karo has extensive experience in both investing education and derivatives trading.
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