Bears took financial markets under control in the last trading week of May. The last trading session of the week coincided with the last day of the month, and lots of shifts happened in the technical outlook for major assets. The bearish reversal pattern completed the change in the market’s sentiment for global stock indices, promising a tough summer for equities bulls. U.S. benchmarks were hit the hardest as S&P 500 lost 2.76% of its value, NASDAQ dipped 2.36%, while Dow Jones Industrial Average plunged 3.01% in a brutal sell-off, which was accelerated on Friday. Overseas stock indices suffered the same losses as NASDAQ approximately as global investors were getting rid of high-risk assets. Logically, safe-havens were in demand. A massive flow to U.S. Treasuries was noticed across the board, causing 10-year yields to drop 8% to lowest levels since September 2017. Gold jumped 1.35%, finishing the 8-weeks consolidation period in a tight range of $1280/1300 per ounce. In contrast, other precious and industrial metals prices slid. Oil traders faced a nightmare of bloodbath sell-off. WTI and Brent Crude prices dropped 10% this past week.
In the foreign exchange market, the U.S. dollar index measuring a volume-weighted basket of six major currencies was gaining 0.73% mid-week, but Friday was a black day for the greenback, which plunged versus majors, erasing all of the previous gains and closing the week flat. Safe-haven currencies were the strongest as USD/CHF (-0.10%) dropped to the parity, while USD/JPY (-0.93%) closed the weekly candlestick far below 109.00 support (108.28) for the first time since April 2018. EUR/USD bounced off the weekly lows around 1.1100 but finished the week with losses of 0.3%. The British pound tested the middle of 1.2500 figure but retraced back above 1.2630 versus the U.S. dollar. Commodity currencies (Aussie, Kiwi and Loonie) weren’t able to benefit from the greenback’s weakness on Friday. Emerging markets currencies including, Chinese yuan, South African Rand and others, as many other high-risk assets were weak with USD/MXN jumping almost 3%. Swedish Krone (USD/SEK -0.93) and Turkish Lira (USD/TRY -4.05%) surprised analysts as both currencies were strengthening despite the risk aversion.
The Dow Jones Industrial Average benchmark is in danger of losing the ground and entering a long-term bear phase. The index dropped more than 3% last week, breaching several technical support levels including 34-weeks exponential and 89-weeks simple moving averages, which never happened since the bullish breakthrough in January this year. Relative Strength index with an extended period of 21 weeks slid below 50%, pointing to the fact that the bull market is officially over. Psychologically, the benchmark dropped below round-figure support of 25000 points, confirming that investors’ sentiment has been changed. The general long-term formation on the weekly chart below looks like a huge triple top with peaks in January and September 2018 and April 2019, while the sequence of lower highs keeps weighing on the technical sentiment. The selling pressure might continue not only this summer but throughout the rest of the year as the reversal pattern hasn’t been worked out yet. There are no significant technical support levels till the lowest weekly close of 22296 points charted in mid-December. If that defensive barrier was breached, the bulls could take the market under control with worst consequence possible. For example, a similar bear phase was noticed during the financial crisis in 2008, when stock indices were falling eight months in a row.
USD/JPY: Extremely bearish.
The weekly squeezed chart below shows that USD/JPY has an extremely negative technical outlook. We’ve drawn only one single line on the chart, but that median is crucial for the pair since the peak in June 2015. The line worked six times as a resistance, holding rates from further appreciation till the bullish breakout noticed 11 months ago. Dollar-yen bulls failed to cross the horizontal static resistance of 114.00 yen per dollar in October and November 2018, which coincided with the peak on stock indices charts. As a result, the pair tested the median line in December last year, having a long whipsaw below. And what we are observing currently is a potentially successful second test of the former resistance now support. A crucial support range is placed around 106.60/106.00 depending on the speed of bullish achievements. If breached, the overall formation would turn into a large triangle with a baseline at 104.70 and workout distance of 2000 pips beyond. Recent weekly close rate confirmes that suggestion. We would not recommend anyone standing against such a powerful downtrend.
WTI Crude Oil: Bearish.
Oil price could drop below $40 per barrel as early as this summer. The technical sentiment turned back to bearish after WTI Crude buyers failed to lift prices above the 38.2% Fibonacci retracement level from the plunge which started in October last year. That fact confirmes that the upwards action was nothing by a technical retracement, and the oil market is back in bear mode. Two-weeks plunge reached an incredible 15% of losses as sellers accelerated after speculators started taking profits from long-term positions before the summer vacation season. The first weekly red candlestick left some hopes for the bulls as the price did not breach 133-weeks exponential moving average. However, the latest red candlestick erased all of the doubts as rates went through several support levels as a hot knife goes through butter. 50% ($60.03 per barrel) and 61.8% ($55.91 per barrel) Fibo supports did not hold the bears from further selling pressure, and the black gold price dropped below $54.00 for the first time since February this year. Next target for the bears is placed at $50.04 per barrel (78.6% Fibo support), and if breached, WTI Crude could cost cheaper than water, falling far below $40.00 as there’s free space beyond from the technical point of view. We’d consider holding short positions or implementing the sell-highs trading strategy if the market would chart bullish bounces and whipsaws.
Mexican Peso led the weakness of emerging markets and exotic currencies as USD/MXN charted the most significant daily spike of almost 2.5%. The pair was testing the bottom of the sideways consolidation range in April, but the bears failed to push quotes below 18.7500 pesos per dollar, and the opposite action started. What we saw last Friday was nothing but the logical continuation of the process as Parabolic SAR was bullish since May 9 when its dots jumped below the price. Williams %R oscillator soared almost to the overbought territory after the corrective slide noticed on May 22. ADX and DI indicator turned extremely bullish as the positive surplus was increased dramatically, even though the main line is still below the threshold. The bulls now eye target of 20.0000 and the trend’s momentum could edge even higher given the recent growth pace. We’d expect USD/MXN to bounce back to 19.5000 where we’ll be looking for intraday bullish signals to go long on the pair.