Financial markets suffered another week of turbulence with most of the instruments under heavy pressure amid volatility spikes. Global equities accelerated the bearish momentum last week, posting one of the worst weekly performances in a decade. US stock indices expanded the negative yearly result, plunging for more than 9% since the start of the calendar year. Here are some numbers for three major US benchmark, showing the depth and speed of recent bear market: S&P500 lost 530.3 points (18%) from its peak value on September 17; NASDAQ100 is down for 1630.8 points (21.2%) from the top of the market charted this year; Dow Jones Industrial Average’s slide is even more impressive: -4506.44 points (16.72%) from all-time high value. All of that decline happened in four months! Weekly results are also disappointing as key US stock indices closed the trading week in lowest rates since Spring 2017: S&P500 -7.43%, the lowest close in 80 weeks since May 2017; NASDAQ100 -7.95%, the lowest close in 60 weeks since October 2017; DJIA -6.43%, the lowest close in 64 weeks since September 2017. European stocks fell in a less sharp pace, while Asian equities plunged sharply, following the North American sell-off. Nikkei225 was down for 5.73%, the lowest close since September 2017.
As a consequence, the currency market was also vulnerable to turmoil and extreme volatility. The US dollar index, measuring the volume-weighted basket of six major currencies, was initially testing 4-weeks lows at 96.17, reversing the price action dramatically at the end of the week, and paring most of the previous losses. DXY closed the trading week with -0.49% result at 96.95, rallying on Friday. The single European currency, as the largest component of the US dollar index, surged mid-week, testing 1.1485 highs versus the greenback, never seen in 6 weeks since early November 2017. However, the U-turn followed and EUR/USD ended the trading cycle below 1.1400 psychological round figure at 1.1367. Japanese Yen was leading the gains among major currencies with USD/JPY losing 1.91% of its value and breaching EMA21 weekly technical support, the first time since April 2018. Even one of the weakest major currencies recently, the British Pound, gained strength versus the US dollar with a modest result of 0.40%. In contrast, commodity currencies including Australian (AUD/USD -2.12%), New Zealand (NZD/USD -1.31%) and Canadian (USD/CAD +1.61%) dollars sold off on heavy-volume selling pressure. Emerging market currencies were also in red.
In other markets, US Treasuries were bid with the yields at the lowest rates since April 2018 led by 10-year securities (2.782%). It’s worth noting that the yield curve, measuring 10y/2y relation, narrowed down its positive surplus to the lowest rate since 2007, signalling an upcoming recession. Safe-haven gold surged for 1.39%, breaching the significant technical resistance at $1250 per ounce, and closing the trading week at $1255.74, the highest price since June 2018. WTI Crude continued its free fall, testing 15-months lows at $45.165 per barrel, and losing 11.81% of its value compared to the previous week. The total loss in the price of oil already exceeded 40%(!) from October’s peak, reminding a similar market crash which started in June 2014.
The upcoming week is supposed to show less volatility and lower volume in the financial markets due to the Christmas Holidays in major Western regions, however, given the latest turbulence and several important technical levels breached, we would not be surprised to see another brutal bloodbath for most of the assets.
Taking into the account bearish momentum which accelerated dramatically, it does not make any sense to analyse short-term timeframes in the scope of technical indicators as all of them are showing extremely oversold levels. The only exception is the exponential moving average with the 21-bars period on the H4 timeframe which perfectly worked as the resistance, showing entry levels for fresh intraday short positions, using sell-highs trading strategy. It would be much more effective to enlarge the technical focus, trying to observe the long-term perspective on weekly and monthly charts. December’s plunge of 13.40% reminds about ugly October 2008 which showed a monthly decline of 16.79% during the latest financial crisis. The monthly chart below turned bearish for S&P500 despite the fact that December isn’t over yet, as MACD histogram went into the negative territory and its lines crossed each other signalling potential change in the long-term uptrend. The bearish divergence on MACD, which was noted during two consecutive highs (double-top reversal pattern), started to play out with a huge distance to go before lines will cross zero levels. The nearest technical support is placed very close to the current price - 55-month EMA at 2319.15. It used to stop the technical retracement in 2016. The bulls should use that defensive line as the last one for the fight with bears if they want to save the uptrend from a complete reversal. Otherwise, we would see S&P500 plunging even lower than current levels. The simple moving average with a 144-months period (12-year average) is currently placed at 1699.19, which looks incredible for the uptrend since March 2009. Nevertheless, everything is possible as S&P500 appeared below SMA144 in 2008, and if things worsened, we would not be surprised to see a much deeper bear market in 2019.
The technical outlook for the US dollar index is rather mixed as long-term charts contravene to the shorter timeframes. Although DXY is still in the daily and weekly uptrend, we suggest that it’s showing first signs of reversal and here is why. First of all, the support line of the triangle (green ascending line) has been clearly breached with a much deeper bearish bottom than previously. Secondly, DXY formed a series of lower lows and lower highs which allowed us to draw a symmetric descending channel (blue) on the H4 timeframe. Thirdly, the bullish bounce was limited by 89-hours simple moving average which represents the bullish weakness, leading to more selling pressure in the short-term perspective. We would recommend seeling the US dollar index right on the market opening next week for aggressive traders. The stop-loss has to be hidden above the horizontal static resistance with possible enlarging of the trading volume near 97.50/70 range as it represents the current market top. Conservative traders should wait-and-see instead of entering the market, observing the price action and especially bearish momentum in the uncertainty zone between 97.00 and 97.70. Once the bears show any sign of weakness there, short positions should be considered for the thin market conditions next week. The nearest target is placed around 95.76, the bottom base of the triangle and lowest close since November 7.
The single European currency remained in the same sideways consolidation range as we showed it before. The latest bullish run was a bit higher than we were expecting, as EUR/USD tested the top horizontal static resistance at 1.1485, breaching through 1.1450 round figure last week. However, a sell-signal came from Bollinger Bands %B indicator confirmed by Williams %R indicator, as both range technical tools were coming off the overbought territory and the bullish momentum was exhausted. Friday’s bounce showed the bearish price action, working out the signal, however, it was limited by SMA89 support, indicating the middle of the sideways range. Both scenarios are possible including the bearish continuation towards the lower static horizontal support at 1.1268 (1.1212 in extension as an extreme bottom whipsaw) and a bullish bounce towards 1.1450. So, we would recommend waiting until EUR/USD would reach support or resistance before entering the market. Intraday signals from oscillators should be monitored, including the fast Williams %R, Relative Strength Index and Bollinger Bands indicator. The buy-lows trading strategy is more likely though.
Dollar-yen breached the recent range, reversing the technical outlook to negative in the mid-term perspective. That all happened on Thursday last week after several failed bearish attempts. USD/JPY performed the bearish breakthrough as the price went off the Ichimoku cloud. The span crossed itself pointing to the downtrend perspective and both base and conversion lines appeared above the current price and below the cloud. The pair has seen below the Ichimoku cloud the first time since August 2018. We suggest a traditional comeback to previously breached support level which will start working as the resistance (112.50). That price would be attractive for short positions, targeting 110.00 as the nearest technical support for USD/JPY (lowest daily close on August 20). A potential profit of 250 pips would be our mid-term target, taking into the account thin market conditions due to the holidays in two or three upcoming weeks.
USD/CAD was one of the most lucrative currency pairs, charting a sustainable uptrend with several slight technical retracements. Moreover, the current trend has been accelerated with the pair closing last week just one pip shy of 1.3600 psychological round-figure resistance. We suggest that it will be breached sooner rather than later and USD/CAD would target the upper trendline of the ascending channel (the large one, green on the daily chart below). Although the upside momentum, some of the technical corrections are possible in the week ahead, and we’ll be searching for fresh entry levels in the range of 1.3450 (December 6 high) and 1.3500. The only technical tool is SMA21 to be monitored for the depth of potential bearish whipsaws, as most of the rest indicators are extremely overbought, given their lagging nature. Buy-lows.