Last week we mentioned a few fundamental and technical reasons for a rebound of the US stocks, describing two long trades on the S&P500 and the NASDAQ indexes. That was a great call indeed as the US stock market made a great come back with the DJIA gaining 5.2% at 25538, the SP500 closing at 2760, a +4.8% on the previous week’s close, and the NASDAQ gained 5.6% closing at 7331.
Besides the general fundamental reasons we described last week, the rally was boosted by FED Chairman Powell’s reference to interest rates being close to neutral, contradicting his previous comments and suggesting a slowdown in interest rate hikes in future FOMC meetings.
A further, sizable boost to the upward movement was provided by the news coming from the G20 summit in Argentina, held over the weekend, during which the US administration announced that for the next 90 days, no new tariffs will be levied on 200 billion dollars’ worth of Chinese products. These tariffs were previously set to come into effect on the 1st of January, 2019. The possible easing of tensions regarding the trade dispute between the US and China added to the positive climate, even if the suspension does not necessarily imply a solution to the dispute, and the US stock indexes, as well as stock indexes in other areas, opened with a huge gap to the upside.
As you might remember, last week we opened two long trades on S&P500 and NASDAQ, indicating the first targets on which we would close half a position and then trail the rest. As expected, the first target was reached within the subsequent day and half of the position was closed, raising the stop loss to break even for both trades. Thereafter, we have been managing the trades, posting real time updates on Twitter and executing the strategy live during our seminars and client sessions in Lagos and Abuja.
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We did the last update on Monday, the 3rd of December, after the big gap up we mentioned before. Besides the high probability that such a gap could be closed in a relatively short time (again, the tariff suspension is good news, but nothing final), we are witnessing a yield curve inversion after more than a decade on US bonds, and that is bad news, as such an occurrence has anticipated a recession in the past. Therefore, during our Alpari client session, we moved the stops and tweeted in real time:
Since then, the market moved toward closing the gap and took our stop profit on NASDAQ, while the trade on S&P500 is still open as we write these notes. Here is the situation on S&P500:
After the gap up, the index stopped right on the 61.8% retracement and on the same exact point it was rejected twice while attempting to climb above the 200 period’s moving average. There is also a doji there signaling uncertainty after the gap.
In this situation, we hold to on our short while the market is pretty close to take out our stop profit at 2765. I know that we are in the “Christmas rally” zone, and some window dressing might be going on by investment banks, but that inversion on the yield curve really points to the opposite direction, in a way confirming my underlying bearish view on stocks.
What I will be looking at is the nearest dynamic support which is a long term one. Should the price go down below again, a short even before the end of the year could make sense.
On the contrary, above the triple top, the price might test 2880 and beyond that head for September highs.
Here is the NASDAQ:
As mentioned, our trailing profit was hit after prices retraced from the gap up. As we can see, the index did not make it to climb above the 50% retracement and is still below the 200-period moving average.
In this situation, we will rather remain neutral. We brought our profits home and there is no graphical confirmation for any kind of trade. The gap could be closed in the next few hours with a test of the ex-dynamic resistance around 6920, while the run to the highs could happen if the price breaks convincingly above 7235.
This week we also managed our short trade on DAX which was some 800 points in the green. As we tweeted in real time, there is no point in giving back so much gain, even if the large head and shoulder is still very active:
The tweet is self-explanatory. As we write this note, the trade is still in place and prices are moving away from the stop profit:
The topic moment will be on the test of the ex-dynamic resistance. If it holds, the price will confirm the divergences on the indicators and will probably move toward the stop.
Here we are well below the 200-period moving average, and so far the reaction from the double bottom has not been convincing. We will hold on to our stop profit and will consider managing it as the situation unfolds this week.
Let’s now have a look at our home run short trade on Brent Oil. The run was closed on Monday after having lowered the stop profit further:
We made an insane amount of profit on this trade and I really hope some of you took our view and traded this sharp drop.
Now we have the OPEC meeting coming this week and we will steer off this commodity for the time being, as volatility induced by the organization’s decision might induce false signals. Odds are that production cuts will be decided and therefore we could assist to pressure to the upside as the chart seems to confirm:
We can notice the breakout of the second dynamic resistance confirming the divergence on the indicators. If we are correct regarding the production cuts, the movement could extend to 64.20, and then 66.
As for EURUSD, last week we were waiting for an inverse head and shoulder pattern to be finalized, confirming the divergences on the indicators before taking a long trade.
And that was a wise decision, as the pattern was not complete, and the cross went back below 13 before starting to rise again. This is further confirmation that trades are to be made only when all elements constituting the set up are in place, avoiding rushed decisions.
Here is the situation:
We still think a long trade can be taken above the resistance area marked in blue, which would also mean the breakout of the dynamic resistance which has been driving prices down since June 2018.
This is all for this week. Apart of the mentioned OPEC meeting which will be held on Thursday, we need to pay attention to the GDP announcement in Australia and ECB President Draghi’s speech on Wednesday, Bank of Canada’s Governor Poloz’s, and FED Chair Powell’s speeches on Thursday, the German industrial production, the GDP announcement in the eurozone, and the Non-Farm Payrolls on Friday.
Have a great trading week!