Volatility eased in the financial markets last week but the risk aversion trading tendency remained. U.S. stock indices tried to pare some of the previous week’s losses initially but failed to hold gains and plunged further, charting new fresh local lows. Monday was the most volatile trading session for equities with a dramatic reversal and bullish rally after whipsawing to the lowest rates since February 2018. The bounce back up followed but another reversal, bearish this time, pushed indices towards the lowest weekly close in eight months. So, S&P500 lost 0.48% of its value, NASDAQ100 tumbled 0.70%, while Dow Jones Industrial Average slipped 1.07% as the weekly result. A different picture was seen in other regions. Major stocks gained strength across Europe and Asia with slight appreciation compared to the previous period. German DAX30 benchmark added 1.30%, French CAC40 finished the trading cycle with +1.16%, Japanese NIKKEI 225 was almost flat (-0.26%). A divergence was noticed between British stock index and local currency. FTSE100 grew for 0.99% while the British Pound was one of the weakest currencies among majors versus the U.S. dollar (GBP/USD -1.15%). The risk-off trading mode lifted the greenback towards 7-month high level as the U.S. dollar index measuring the volume-weighted basket of six major currencies added 0.73% to its value, closing the week at 97.42. Euro, Swiss Franc, Japanese Yen, Australian, New Zealand and Canadian dollars - all in red. That price action was directly correlated to U.S. Treasury yields which reversed the bearish slide and showed a lack of buyers for the fixed-income market. Precious metals declined due to the bonds market cooling, while industrial metals dipped on trade war tensions. WTI Crude and Brent oil were weakening again with -1.77% and -1.66% performance respectively. The recent trend is set to continue, if not accelerate, in the week ahead and here is why.
The price action scenario that we’ve described last week worked perfectly with S&P500 benchmark bounced up to the exponential moving average with 21-days period (green curve on the chart below, 2685.7) before reversing and charting new fresh lows at the end of the trading week (2601.5). Williams %R oscillator bounced up in accordance to the price action but the level of -50 was not achieved as the indicator works with close prices and does not take whipsaws in the count. Nevertheless, the sell-signal has been confirmed and those traders, who did not miss such an opportunity to follow the bearish trend, could end up the trading week with a crisp profit of 842 pips as S&P500 tumbled more than 3% in three days. Looking ahead, the technical outlook is negative for the benchmark with further downside risks persist for the nearest future. Taking in count the recent hardihood caused by the bulls’ power, we would not consider shorting S&P500 right from the current levels. Another upside spark is possible before the downtrend renewing its momentum. Therefore, the sell-highs trading strategy would be still in play with two possible ranges to be tested next week. The first one - aggressive - is between 2629.0 (the lowest close on December 9) and 2657.8 (the highest daily close on December 12). EMA21 resistance should be coming around the upper level of that range, so it should be profitable to use that technical tool to monitor the bearish momentum. Although, a more conservative line would be waiting for S&P500 to bounce back to SMA89 resistance (blue curve) before entering the market with fresh short positions. The same way it happened at the beginning of December, and the recent range is rather wide due to the importance of current technical levels. Such a scenario does not look as highly probable, however, the likelihood still exists.
The last week’s performance did not confirm initial signs of a possible reversal in the DXY uptrend. Moreover, the U.S. dollar index charted a bullish continuation pattern with a huge triangle on the squeezed H4 timeframe below. The downside breach of the lower support line (green) of that triangle was false as the index climbed towards the horizontal static resistance (blue), the third time since November 12. Traditionally, strong resistance levels are breached with a third attempt, and once we’ll see rates closing clearly above 97.64/71, we’ll be able to move the bullish target up. The triangle pattern suggests an equal price range to be overcome after the bullish breakout, measured by the vertical base of the triangle (yellow). Therefore, we suggest DXY target 99.70 in the nearest future, if the horizontal resistance breached. Otherwise, a bearish reversal signal would occur, with a less probability though. We would recommend using buy-dips trading strategy for the next week with an attractive level around SMA144 support (96.93 currently) to renew fresh long positions or add more volume.
Things aren’t so obvious for the most heavy-volume currency pair in Forex market as for the U.S. dollar index. The technical outlook is mixed with a slight bearish bias. The bullish continuation scenario did not work last week, however, our target of 1.14500 has been almost achieved (1.14427 weekly high). The bulls were unable to break the upper line of the descending channel which was comprehended as weakness by the bears. EUR/USD sellers stepped in, pushing the pair lower, as Williams Price Range oscillator was showing an extremely overbought level on Monday, December 10. However, the bulls fought aggressively with two strong barriers noted last week - 1.13110 (December 11, Williams %R at oversold level) and 1.12683. The last price level represents a strong bullish demand for EUR/USD with the pair bouncing three times from it recently. Williams oscillator went off the oversold range on Friday last week, signalling further upside risk in the nearest days. The wider technical picture suggests a tight range of 150 pips approximately with 1.1270/1300 support and 1.1400/50 resistance. We do not see the pair to come out of that range in the week ahead at least, so selling highs and buying lows would be the best trading approach, keeping take-profit and stop-loss orders tight.
GBP/USD: Extremely Bearish.
Technical outlook looks ugly for the British Pound. The previous week’s bottom (1.2480) represents a level never seen in 20 months since April 2017. Moreover, GBP/USD closed the trading week below the local bottom which represented the support in June 2017, the level from which Sterling continued its 10-month bullish trend. All of those negative achievements erase any chances to reverse the downtrend in the foreseeable future, so, we expect GBP/USD to decline further. The exponential moving average with 21-days period holds prices from further gains, working as the resistance since November 13. Therefore, the nest trading strategy would be to wait for a bullish bounce toward that curve before entering the market with fresh short positions. Talking about possible targets, we should mention the descending channel with the current bottom around 1.2350 approximately. Once that defensive bullish barrier is breached, the next support level will be placed at 1.2109 (lowest price since March 2017) which is extremely close to all-time lows around 1.2000 round figure. We would not be surprised if the British pound lost the ground next week, given the speed of the recent decline. Aggressive traders should consider shorting GBP/USD from the current level right on the market opening, adding more volume on possible bullish whipsaw (1.2650) and placing postponed sell-stop breakthrough orders below the local bottom (1.2480). The appropriate depth of the account balance is needed for such an aggressive trading strategy with money management rules to be applied as well. However, potential profits should pay out possible risks.
Another accurate forecast was made for AUD/USD last week with the pair testing 0.7150 technical support level. The price action forced us to adjust the green ascending channel on the daily chart below. We would suggest that Aussie will stay in the tight range between two dotted green lines next week with a slightly bullish bias. However, we would not recommend going long on the pair as further downside risk is quite strong given the body value of the latest bearish candlesticks. On the other hand, shorting AUD/USD would not be a technically-correct approach as the long-term reversal bullish pattern is still in play. Although the same level of 0.7150 represents a strong barrier for the bears, and if it was breached, the bulls would be forced to move the next defence line towards the lower line of the wide range (0.7070). Therefore, placing a sell-stop postponed order below that mark isn’t a bad idea from the technical perspective at least. On the other hand, conservative traders should wait for the pair to bounce back up to 0.7250 resistance before making the conclusion based on price action around that level. The conclusion is ‘Neutral’ so far.
The Kiwi has changed the technical outlook, in contrast to the Aussie. We expect a further slide for NZD/USD as Ichimoku Cloud trend indicator points to a deeper bearish retracement. Although the span is still bullish in the long-term perspective, the price action performed as a reversal (or corrective at least) formation. First technical sign to take the profit or to open new aggressive short positions was seen on December 4, when NZD/USD charted the inverse hammer candlestick with the long shadow on the upside and small body. The second confirmation of a deeper plunge was noticed on December 7 when the pair breached Ichimoku conversion line support. Next several bullish attempts failed to push the Kiwi back on track, and conversion line works as the resistance since that time. Baseline support has been breached by Friday’s acceleration of the downfall, and we would expect NZD/USD to test the next support range of the span itself which is currently placed between 0.6642 (lower band) and 0.6735 (upper band, more likely to hold extension losses).