Welcome to Technical Tuesday, a weekly report where we highlight some of the most interesting markets that will hopefully reassure technical analysts and traders.
In this week’s edition, we’re technical on the 10-year US bond yields, gold, EUR/USD and the S&P 500. So, there’s something for everyone.
- Yields are down, but will they rise back up?
- Gold attempting a breakout
- EUR/USD is rising in the bearish channel
- Stocks continue short-covering rebound
Yields are down, but will they rise back up?
One of the main drivers behind the financial markets’ view of rising yields this year as a result of heightened fears of rate hikes amid rising inflation. In recent days, yields fell as softer-than-expected US economic data raised speculation that there might be a shift in central bank policy. Consequently, we’ve seen stocks rise along with metals and foreign currencies, with the dollar going in the opposite direction. The key question for investors in any of these markets is whether the moves will continue. After all, it’s not the first time we’ve seen this kind of pressure this year, only for the selling pressure to then resume and go deeper than the rally. Fundamentally, not much has changed, but there is enough “hopi” in these markets.
So, it’s only fair that we start this Tech Tuesday article with a look at the benchmark US 10-year bond yield:
According to the chart, the 10-year yield has now reached a key support zone around 3.50% to 3.63%, which was previously resistance. As often happens in rising trends, old resistances often become support, leading to renewed strength. Will we see something similar in bond yields again? If so, then watch out for another selloff in stocks and gold. Speaking of the shiny metal…
Gold attempting a breakout
The precious metal rose sharply along with everything else as mentioned above. It is now trying to stage a breakout from the bearish channel it has been stuck inside for several months. Last time it attempted a breakout, on August 10th, it failed miserably. Will it be Déjà vu again for gold investors? Or will it be a different story, especially as central banks around the world added to their net gold holdings for the fifth consecutive month in August, according to the World Gold Council?
As much as I think gold is going higher in the long term, rising interest rates are what have continually caused gold to sell off. Considering not much has changed on the rates, I’m more inclined towards another failed breakout attempt than a real one.
But let’s wait for the market to decide, because it could be that the market has now fully priced in the near future rates. It is always good to be prepared for any outcome. Indeed, if gold continues above its recent high at $1735, then that would be the confirmation that many prospective buyers might be waiting for.
On the other hand, a move back below Monday’s high around $1700 could see the bulls begin to exit the long positions they have accumulated in the last week to this. And a possible move back below $1675/6 area, which was last year’s low and pivotal level, would be the confirmation the bears would need.
EUR/USD is rising in the bearish channel
The FX markets followed the events in bond and equity markets pushing foreign currencies higher in favor of the US dollar. Anyone who calls the top of the dollar will be very brave, because the Fed is not done with aggressive rates yet.
Like gold, the EUR/USD was stuck in a long-term bearish channel. It is now testing a very important resistance area between around 0.9945 to 1.0000, which was previously a support. A clean break above parity will be bullish. But there’s still no major fundamental justification for that, I don’t think.
Support is seen around 0.9850, the base of today’s breakout. A daily close below this level will be quite bearish.
Stocks continue short-covering rebound
As mentioned earlier, supported by hopes that softening US economic data will lead to a change in central bank policy, stocks have risen along with metals and bonds, and the dollar is heading in the opposite direction. The key question for investors in any of these markets is whether the moves will continue. After all, it’s not the first time we’ve seen this kind of pressure this year, only for the selling pressure to then resume and go deeper than the rally. Fundamentally, not much has changed, but there is enough “hopi” in these markets.
With the markets being almost one-sided – namely long dollar, short everything else – the liquidation of those positions is undoubtedly a big reason why the markets squeezed in the other direction so brutally. As indices such as the S&P 500 rise, it is essential that the bears wait for the right moment – and signal – before stepping back into the short side.
In the last day and a half, it was a one-way trade higher, giving the bulls hope. But more evidence of a bottom needs to be seen before I drop my bearish technical outlook on the stock markets.