The vast majority of heavy-volume assets declined in the financial markets this past week, breaking through multi-weeks low levels. Global sell-off in equities was lead by the U.S. benchmarks, as S&P500 fell 4.15% on weekly basis, NASDAQ100 declined by 3.33% and DJIA30 posted the slide of 3.15%. Major currency pairs were trading on the bearish bias as well: EUR/USD -0.96%, GBP/USD -1.8%, USD/JPY -0.55%. The heaviest hit was seen in Japanese yen cross-rates: EUR/JPY - 1.45%, GBP/JPY - 2.41%. Commodity currencies were hovering around the recent lows while emerging markets currencies were among the weakest. A further weakness was also seen in WTI Crude Oil price (-2.44%) while gold gained strength (+0.54%). The upcoming trading week is expected to keep the same price action for most of the assets, especially in the light of the month-end.
The recent sell-off in the U.S. stock indices is often compared to the same retracement which took place in February 2018. However, October’s plunge is different, though it could turn into the bearish market for quite a long time, and here is why. First of all, the weekly close price is below the 55-weeks Simple Moving Average (yearly average price), the first time since March 2016, or 31 months. Secondly, more losses are seen as the price does not have such a long downside shadow on the weekly candle, the way it had in February, before the bullish reversal. Thirdly, S&P500 benchmark is very close to testing very long-term 89-weeks Simple Moving Average which currently comes at 2614.03 level. The last time the stock index was below SMA89 was in August - October 2011. In case if the bears managed to break that support, the long-term technical perspective would turn into negative for the index. The next crucial technical support is the 2018’s year low at 2528.23. One more reason is that MACD indicator turned bearish with the histogram under the zero mark and huge bearish divergence has not still worked out with both lines crossed each other. Further decline is expected.
The U.S. dollar index, measuring the volume-weighted basket of six major currencies versus the greenback, picked up the bullish momentum this past week. Dollar bulls managed to break through 96.12 resistance level with the weekly close price, after two failed attempts. Considering the bearish pullback on Friday, we would expect the index to come back to the support level (broken resistance), and we will be looking for long positions from there. The bullish run started with the spring from SMA89 on the four-hour chart below, so this level is also crucial to monitor and hide the stop-loss order below it. However, the fast RSI oscillator is still in the positive territory (above 50% level), coming off the overbought zone. So, we do not think that the market would give us such a gift like re-test of SMA89, and DXY should continue its bullish run from 96.12 static support. The nearest target is placed at August highs (97.00 roughly), and it’s just a matter of time, how soon we will get there.
The single European currency got out of the 4-weeks range, breaking through significant technical support at 1.1430. Considering the bearish test of 1.1350 support on Thursday, we would suggest that the upcoming test of 1.1300 support is unavoidable for the upcoming week. That static support represents the lowest price in 2018 and if breached, the market players would have the bearish precedent weighing on EUR/USD. The bulls seem to shift their defensive positions lower with postponed orders accumulating around 1.1200 level. The trading scenario is assumed in the same way as for the DXY but in the opposite. A come back to 1.1430 level is the best price for aggressive traders to short the pair. The SMA89 is the next pivot point to monitor. Large accounts could add more volume, shorting EUR/USD while intraday conservative traders should hide their stop-loss orders above it.
GBP/USD: Extremely bearish.
Sterling bulls failed to hold GBP/USD from completing the technical bearish reversal pattern. The support line of the blue ascending channel has been breached by sterling as a hot knife comes through the butter. The British pound lost the ground after GBP/USD eliminated the bullish defensive support level at 1.2950. As the result, 1.2800 figure has been tested with weekly lows at 1.2775. Here comes the former resistance line which used to be the barrier for the bulls throughout the whole downtrend in the first half of 2018. It is not breached yet by the weekly close prices technically, however, the lower lows on the chart are definitely the signs of weakness. The next significant support is placed at 1.2664 (year low), and there is no technical reason to avoid a test of that static target in the nearest future, taking in count the speed of the recent sterling’s plunge. All of the technical indicators intraday are at oversold levels, however, we would not recommend standing against the cable falling like-a-rock.
The short-term technical perspective is negative for USD/JPY. The test of 113.00 resistance was not successive for the bulls (Monday’s high 112.88) and the bullish retracement did not have any development. In addition, we have lower lows (111.38 weekly low) on the cards as the bearish continuation sign. More weakness is expected for the pair also due to the breakout of the daily support line which comes from a reversal point on March 23, 2018. However, we decided to show the daily chart in the scope of crucial technical support range. We suggest that USD/JPY bulls would not give up the 7-month uptrend so easily. Ichimoku Cloud indicator is still bullish on the long-term perspective until the span crossed and the current price is still above the cloud. The latest whipsaw with the long downside shadow on Friday’s candle confirmes strong demand for the pair at this level. It will be extremely important for the bulls to hold USD/JPY above the bottom of the span. Otherwise, if the daily close price will appear below 111.48, then the bearish reversal pattern will be completed and the trend will change.
GBP/JPY: Extremely bearish.
As long as both components of GBP/JPY cross-rate (GBP/USD and USD/JPY) move in the same Southwards direction, the pair has the most attractive volatile price action. The weekly plunge was registered at an impressive result of 227 pips. GBP/JPY breached all of the crucial support levels on the weekly chart: both baseline and conversion line together with the lower range of the span which is extremely bearish. The weekly close at 143.51 is the lowest price in 10 weeks. A test of the year-low level at 139.90 seems to be unavoidable, and there is no support until 135.83 from the technical perspective. Sell-highs is the most profitable trading strategy for GBP/JPY.