Bond prices shoots up as stocks look for direction from the bond market, 2 years note yields rose as market participants pared back expectations for a deep FED interest rate cut comes end of the month.
The commodity market was boosted by rising crude oil prices and coal prices (both stands at a life time high) yet appetite for the precious metal ‘gold’ remains anemic and industrial metal ‘copper’ was flat.
On the stock market, technology stocks earnings eclipsed dismal earnings of giant banks, additional write downs from Merrill and Citi were taken positively by the market as Dow Jones delivered two triple digits gains (Wednesday and Friday). Likewise, Asian stock market led by Nikkei Index rose on Yen weakness but Shanghai Index continues to fall and dragged Hangseng with it, as a result Hangseng closed the week mixed.
CURRENCY MARKET:
Currencies of two countries that aggressively cut interest rates for the past months to stimulate their ailing economies stalled by the recent credit crisis due to its’ sub-prime mortgage mess had risen the most (in relative percentage terms) against its’ peers in recent weeks. I am referring to US Dollar and British Pounds. The significant rally of both currencies were due to dealers perception that 2.0% could be the lowest point of the current FED funds rate-cutting cycle (FED Funds Rate stands at 2.25%).
On the other hand, low yielding currencies (such as Japanese Yen and Swiss Franc) widely used for ‘carry trades’ weakened the past weeks evidenced of some risk appetite returning into the stock market while Eurodollar gradually drifted to the downside.
Japanese Yen Index
The broad weakness in the Japanese Yen the past weeks may be due for a rebound because last Friday the index had its’ 3rd gap down or ‘exhaustion gap’ and it formed a bullish hammer candlestick reversal pattern.
BOND MARKET:
Two (2) years USD Treasury Notes yield which responds closely to expectations of FED rate moves went free falling from July ’07 to March ’08 in line with the deep fall in the US Dollar as FED cut rates from 5.25% to 2.25% in a span of 9 months. However, yields in the 2-years note may have found bottom last month as it spiked up and broke-out from its’ inverted head & shoulder reversal pattern; the bullish divergence in its’ RSI and MACD indicators confirmed there was momentum in its’ break-out. The sharp rise in the bond yields provided the buoyancy and stability in the US Dollar as investors bet on the potential bottom in sight on the current FED funds rate cutting cycle.
Likewise, 10-years USD Treasury Note spiked up and broke-out from its’ symmetrical triangle pattern and downward resistance; however, it encountered strong resistance at previous trough and formed a potential shooting star reversal candlestick pattern; hence a pull back after its’ spectacular rise may be necessary for the bond market and its’ stochastic indicator confirms a possible pull back.
COMMODITY MARKET:
The sharp rise in the bond market and volatility in the US Dollar had kept investors cautioned on being too aggressive in the commodity market as the precious metal ‘gold’ momentarily losses its’ shine and looks headed to re-test its’ recent trough and industrial metal ‘copper’ continues to move sideways on downward bias. On the other hand, it was a spectacular week for light crude oil and coal as both traded at new record highs with crude oil had its eyes on the $120/barrel and China’s strong demand for coal pushed coal prices to un-chartered territory.
The commodity index (CRB) closed the week with a ‘dragon fly doji’ bearish reversal candlestick pattern after it failed to take-out recent peak, its’ long lower shadow provides evidence of buying pressure but the low indicates that plenty of sellers still loom; moreover, its’ stochastic indicator at over bought levels crossed over for ‘sell’ could indicate downward bias for the coming week.
ASIAN STOCK MARKETS:
The upbeat U.S. Equity Markets fueled a strong rally in the Nikkei Index as both S&P500 and Nikkei Index took –out recent peaks; however, Hangseng failed to take-out its’ recent high and gains were moderated by the deep fall in Shanghai index.
Undeniably though, the week’s best performer belong to the technology sector. Therefore, we shall start looking at the Nasdaq Composite chart before the S&P500 Index. After which we shall look at Nikkei, Shanghai and Hangseng Indices.
Nasdaq Composite leaped a spectacular 5.0% week-on-week (highest in 87 weeks), but two (2) gaps up in a week may be too much for the index to sustain. I looked at Nasdaq’s historical chart to find similar instances in the past where the index made 2 gaps in a week and observed how the index responded after the 2 gaps (available only to subscribers); meanwhile, Nasdaq Composite failed to break above its’ 100days moving averages as it encountered strong resistance at 2,400 levels, a key Fibonacci Resistance Level.
S&P 500 INDEX:
The Index broke above several key resistance levels: major resistance trend line, 38.20% Fibonacci Resistance, 100days moving averages and recent high; however, another strong resistance awaits at 1,415 levels (this coincides with its’ November ’07 trough, downward resistance and 50% Fibonacci resistance level).
Observing the volume activities for the index, we have expanding volume on good days and contracting volume on down days, this is not bad after all but using the Chaikin Money Flow Oscillator (used for measuring accumulation activities) we have a negative divergence: this happens when prices are going up and volumes are going down. For the current up trend to be sustained we need to see volume keep on expanding not decreasing.
Volatility Index is at its’ lowest in 4 months and it completely broke below its’ major trend line support and 200days moving averages; however, it finished the week with a bullish hammer candlestick pattern, this may indicate a slight rebound for the coming week and its’ stochastic indicator is at extreme over sold levels.
Nikkei Index: The break-away gap last Thursday inspired a follow up buying last Friday as the index closed the week at its’ high; the market now seeks to test its’ 2006 trough which serves as major resistance after it broke above its’ downward resistance, but a potential rebound of the Japanese Yen may derail the index from testing its’ resistance immediately.
Shanghai Index: The index stabilized for 1.5 months near its’ 38.2% Fibonacci Key Support Level before it broke below said level and resume its’ downtrend, as the index approaches its’ 61.8% Fibonacci Key Support Level, market may stabilize once more and possibly had a modest rally as its’ RSI Indicator develops a potential positive divergence (though it’s too early to call it a divergence).
Hangseng Index: The index oscillates between its’ 50 and 100days moving averages, these two MAs now serves as the index trading band; the downward resistance turned support line still managed to holds in spite selling pressure due to deep falls from Shanghai Index. Buying interest in the market remains anemic as value turn-over shrunk –14.0% week-on-week and –3.0% month-on-month.
CROSS MARKETS REPORT SUMMARY
Is business as usual at Wall Street and global stock markets off the hook? Technically, financial markets successfully hurdled several key resistance levels: Bond yields spiked up as the market bet on 2.0% as the low point of the current FED funds rate-cutting cycle (that is 25bps from current rate), these kept the US Dollar from falling further and carry trades currencies were weak across the board as investors suddenly turned bold to take some risk into the stock markets. In the commodity realm, spot gold continue to slipped as light crude oil and coal prices shoots up.
The Week Ahead
Bond yields need to ease after the spike; Japanese Yen Index formed a bullish hammer candlestick pattern after its’ 3rd exhaustion gap down, it is due for a rebound; likewise, Volatility (VIX) Index formed a bullish hammer may indicate a bounce is just around the corner and S&P500 Index moves inversely with its’ Volatility Index therefore a bounce from VIX means a pull back from S&P500 Index; Commodity (CRB) Index failed to take-out its recent high and a pullback should be forthcoming as commodities are at extreme over-bought levels; Nasdaq Composite 2 gaps up in a week may be too hot to handle; Shanghai Index should stabilize and possibly had a modest rally as the index nears its’ 61.8% key Fibonacci Support Level and finally Hangseng Index will re-test the upper band of its’ trading range which is also its’ 100days moving averages.
Key Factors To Monitor
1.) Volume turn-over should start to pick up for both S&P500 Index and Hangseng Index; otherwise, the up trend may not be sustained.
2.) 61.8% Key Fibonacci Support Level for Shanghai Index should hold; otherwise, it will pull Hangseng Index down with it.
3.) Market expectations on next FED moves as they meet comes end of the month.
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