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Inflation spooks investors

May 16, 2021

Last week: There was another noteworthy event last week and this was the print of much higher than expected US CPI data. The higher inflation data raised the specter of higher interest rates and this certainly spooked stock traders and investors and soured risk sentiment. So much so, that the S&P500 and DJIA have printed bearish-reversal weekly candles and the VIX printed a bullish-reversal weekly candle. Both stock indices remain above 14-month support trend lines but these will be in greater focus in coming sessions, especially since trading volume on both indices jumped higher last week with this recent sell-off. Of some surprise though, to me at least, is that the DXY did not make as much of a weekly gain out of this US inflation news; as might have been expected. On a brighter note, I had warned in last week’s update to watch for any bullish continuation with the new GBP/USD breakout and this evolved to deliver up to 220 pips so I hope some of you caught this great move. There are plenty more trend lines to monitor next week and the AUD/JPY might be in particular focus, especially if risk sentiment sours, as it trade near the major 85 S/R level.

 

NB: I am away this week and so mid week updates from Mon- Fri may be a bit more brief than usual.

 

Technical Analysis: It is important to keep in mind that this analysis is Technical and chart-based but that any major Fundamental news items, as recently seen with Covid-19, have the potential to quickly undermine identified chart patterns. This is why it is critical that traders appropriately manage their trade exposure and risk per trade during these volatile market conditions.

 

Trend line breakouts: Updates posted throughout last week can be found through the links here, here, here and here:

 

  • GBP/USD: a TL b/o for 200 pips.
  • GBP/JPY: a TL b/o for 200 pips.
  • AUD/USD: a TL b/o for 100 pips.
  • NZD/USD: a TL b/o for 90 pips.
  • USD/JPY: the TL b/o for 40 pips.

 

This Week: (click on images to enlarge):

 

    • DXY: US$ Index: The US$ index closed with a bullish-coloured Spinning Top weekly candle, reflecting indecision. Watch the revised weekly chart support trend line for any new make or break.

 

DXY weekly: an indecision-style weekly candle:

 

    • Dogecoin: I listened to a very interesting podcast on Dogecoin yesterday and this piqued my interest in its chart. Here is a link to my recent post with my view of DOGE/USD.

 

    • 10-yr T-Note Interest rate: The chart of the 10-yr Treasury Interest rate shows the recent bullish breakout from the triangle congestion pattern remains paused under the weekly 200 EMA region but above the Resistance turned Support region of 15.

 

  • 10-yr T-Note Interest rate:  the sideways consolidation continues:

 

 

    • % Stocks above their 200 Day Moving Average Index: The Percentage of stocks above their 200 Day Moving Average is below the 85% region. The first chart below gives a perspective of this current level and shows the previous peaks near 92.50% and how there often tends to be some mean-reversion once such lofty levels are reached. The second, expanded, chart shows the continued struggle under the 92.50% level.

 

% of US Stocks above the 200 Day Moving Average: watch for any further reaction at the 92.50% region:

 

% of US Stocks above the 200 Day Moving Average (expanded): holding below 92.50%:

 

 

    • S&P500: Keep the bigger picture in perspective with the recent moves as this chart suggests there is a lot more room to move with the overall bullish run. However, this does not discount the odd pullback along the way as trends do not travel in straight lines forever; they tend to zig and zag their way along either bullish or bearish paths. Note how the recent Covid dip does not even figure on this chart!

 

S&P500 yearly: keep this latest move in perspective:

 

 

    • Market Phases: It is important to recall the three main types of market phases: Accumulation, Participation (Up and Down) and Distribution. Traders should monitor the chart of the S&P500 chart for any Distribution type activity that might eventually lead to Participation Down; especially as the S&P500 trades up near an all-time High. The chart below shows how the S&P500 evolved in the years leading up to, and during, the Global Financial Crisis (GFC). Note how the Distribution phase evolved over a period of many months and there was a double test of the all-time High region. Keep this in mind with the current market action on the S&P500.

 

S&P500 market phases: Global Financial Crisis 2007-2009:

 

S&P500: keep watch for any Distribution type of activity:

 

 

    • Copper: Copper is often viewed as one metric of economic health and closed with a bearish weekly candle after printing a new all-time High. Note how price pulled back to test the previous all-time High region of circa 4.65 BUT is holding above this level for now.

 

Copper weekly: watch 4.65 for any support:

 

 

    • Emerging Markets: The Emerging market ETF, EEM, closed with a bearish weekly candle and remains below the 12-month support trend line. However, price action remains above the previous High of 52 and this may act as some support so watch for any (revised) Bull Flag breakout: up or down.

 

EEM weekly: watch for any new Bull Flag breakout:

 

 

    • DJIA: The DJIA closed with a bearish-reversal Hanging Man weekly candle after briefly topping the whole-number 35,000 level. The trend remains UP, given the print of higher Highs and higher Lows, but keep watch for any shift. As with the S&P500, trading volume jumped higher with this recent sell-off so watch for any continuation move here:

 

DJIA weekly: pegged by 35,000:

 

 

DIA weekly: the chart of the DJIA ETF shows how trading Volume jumped above the 200 MA and bear trend line:

 

 

    • NASDAQ composite: The NASDAQ Composite Index closed with another bearish weekly candle as price continues to hold under the previous all-time High. There seems to be ongoing Double Top hesitation here but note the revised Bull Flag giving traders trend lines to monitor for any new breakout. 

 

NASDAQ weekly: watch for any new Flag breakout:

 

 

    • DAX weekly: The DAX closed with a bullish-coloured Dragon Fly Doji reflecting indecision. As with the DJIA, the trend remains UP for now, given the print of higher Highs and higher Lows, but keep watch for any shift:

 

DAX weekly: the trend remains ‘up’:

 

 

    • Russell-2000: The Russell-2000 is often viewed as the ‘Canary in the Coal Mine’ for US stocks and the index closed with a bearish weekly candle and there is a shift towards bearish momentum as price action has made a new break below the Flag trend line. However, the Index continues to hold above the 61.8% Fibonacci extension of the Covid-induced Swing Low, and the 2,200 level, so watch for these two regions for any potential support.

 

RUT weekly:  watch the 61.8% Fibonacci and 2,200 for any new bearish breakdown:

 

 

    • Bonds / TLT: The Bond ETF, TLT, closed with a bearish weekly candle.

 

TLT weekly: still holding above the 135 level and the 61.8% Fibonacci:

 

 

    • Commodities: this bullish descending wedge breakout remains in play BUT the index printed a bearish weekly candle:

 

DBC weekly: a bearish weekly candle so watch for any pause with this bullish wedge b/o:

 

 

    • VIX: the Fear index closed with a bullish-reversal Inverted Hammer weekly candle BUT remains below the 20 level.

 

VIX weekly: watch the 20 S/R level for any new make or break:

 

 

Calendar: Courtesy of Forex Factory:

 

Earnings: Courtesy of Earnings Whispers:

 

 

Market Analysis:

 

S&P500:  The S&P500 closed with a bearish-reversal Hanging Man weekly candle and, although the index remains above a 14-month support trend line, this bearish weekly candle does not inspire a lot of confidence.

Traders should watch for any new break below this 14-month support trend line but, if such a break triggers, then watch for any potential Bull Flag activity.

Added to this, trading volume was higher last week and has broken ABOVE the 200 MA and bear trend line so watch for any increased Volume with any developing sell-off.

 

S&P500 ETF: SPY weekly: note the new 200 MA and volume trend line breakout.

:

The index closed just under the 4,200 level making this the new resistance to monitor for any new make or break. There are also revised 4hr chart trend lines to monitor for any new momentum breakout.

NB: The second weekly chart shows how the 61.8% Fibonacci extension of the Covid-induced Swing Low is up near 4,150 so watch to see if this region continues to offer support.

Bullish targets: any bullish 4hr chart triangle breakout would bring 4,200 into focus followed by 4,300.

Bearish targets: any bearish 4hr chart triangle breakout would bring 4,150, 4,100 and the 14-month support trend line into focus.  After that, watch whole-numbers on the way down to the weekly chart’s 61.8% Fibonacci retracement level, near 3,000.

  • Watch 4,200 and for any new 4hr chart triangle breakout:

 

 

 

ASX-200: XJO: The ASX-200 closed with a bearish-coloured Spinning Top weekly candle, reflecting indecision, BUT still above the pre-GFC High of 6,851.50, pre-2020 High of 6,893.7 and the whole-number 7,000 level. Price closed just above 7,000 so that will be the support to monitor next week.

Trading volume was slightly higher last week BUT is still below the 200 MA and bear trend line so watch for any new breakout.

 

XJO weekly: keep watch for any new b/o above the 200 MA and bear TL:

 

 

Keep in mind that the recent Golden Cross still remains valid. The Golden Cross is a bullish signal where the 50 SMA crosses above the 200 SMA. Such crosses are often, but not always, followed by a decent bullish run so these crosses are worth noting:

 

XJO daily: the recent Golden Cross remains valid for the time being:

 

There are revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish 4hr chart triangle breakout would bring 7,100 followed by the 2020 High of 7,197.20 into focus.

Bearish targets: Any bearish 4hr chart triangle breakout would bring the pre-2020 High of 6,893.70 and the pre-GFC High of 6,851.50 back into focus followed by 6,800 and 6,700.

  • Watch for any new 4hr chart trend line breakout:

 

 

 

Gold: Gold closed with a small, bullish weekly candle and continues to trade just under the 4hr chart’s 61.8% Fibonacci level, near $1,850. The recent bullish wedge breakout tally remains at $110.

As mentioned over recent months: The hold below $1,900 acts as further evidence in support of the longer-term Inverse H&S thesis that I have been discussing as an option here for many months.

The weekly chart still has the look of a broad Inverse H&S pattern; or some may see this as a broad Cupping style pattern. Both are rather similar though as they are bullish patterns and suggest follow-through to the order of magnitude of the depth of the Cup / height of Head. In this case, that move is of around either $800. Keep watch of $1,900 now that price action is trading below this neckline region!

$1,900 remains the region in focus for any bullish Cup or Inverse H&S breakout:

  • Any hold above $1,900 would support the Cup pattern thesis.
  • Any move back below $1,900 would support the Inverse H&S pattern thesis.

Traders need to watch this $1,900 level over the coming sessions especially as the US$ index is still below the recently broken 10-year support trend line:

  • any US$ hold below the multi-year support trend line could help send Gold higher.
  • any US$ move back above this support trend line could keep Gold range-bound. This would help to further develop the Inverse H&S pattern.

The daily chart reveals the importance of the $1,670 level so this continues to be a ‘line in the sand’ support level to monitor. Any new weekly close below the $1,670 level would bring $1,500 into greater focus. The two weekly charts show that $1,500 is:

  • near the 61.8% Fibonacci of the Aug 2018 – Aug 2020 swing High move.
  • forms the lower boundary of the Inverse H&S pattern I have had on my charts for many months.

 

Bullish targets: any bullish breakout above $1,850 and the upper 4hr chart triangle trend line would bring the key S/R level of $1,900 into focus.

Bearish targets: any bearish retreat from $1,850 would bring the lower 4hr chart triangle trend line into focus followed by $1,800. After that, watch $1,700 and the $1,670 support level.

  • Watch $1,850 for any new make or break:

 

 

 

EUR/USD: The EUR/USD closed with a bearish-coloured Hanging Man style weekly candle under the 1.22 level. The recent 4hr chart wedge breakout tally remains as 370 pips.

NB: Note that the longer-term target for any continued bullish movement following the previous break of the 13-yr trend line is the monthly chart’s 61.8% Fibonacci, near 1.40. This trend line breakout was flagged back in a post on August 2nd 2020. Price at the breakout was around 1.17 and has reached up as far as 1.23, a move of around 600 pips, so this has been a breakout worth monitoring.

There are revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish 4hr chart hold above the monthly 200 EMA would bring 1.22 into focus followed by whole-numbers on the way up to a previous weekly chart High, circa 1.26. After that, watch for any continued push up to 1.40.

Bearish targets: Any bearish 4hr chart break of the recent support trend line would bring 1.21 and 1.20 back into focus.

  • Watch the monthly 200 EMA for any new make or break:

 

 

 

AUD/USD: The Aussie closed with a bearish-coloured, almost Inside, weekly candle reflecting indecision.

Price action closed just under the 0.780 level so this will be the one to watch for any new make or break.

NB: The longer-term target for any bullish continuation from the weekly/monthly chart’s Descending Wedge breakout is the weekly 61.8% Fibonacci, near 0.90. This monthly wedge trend line breakout was also flagged back in the post on August 2nd 2020. Price at the breakout was around 0.71 and has reached up as far as 0.80, a move of around 900 pips, so has been another breakout worth monitoring.

Bullish targets: Any bullish 4hr chart triangle breakout would bring 0.78 and 0.79 into focus. After that, watch whole-numbers on the way back to the 12-month TL and, then, whole-number levels on the way up to the weekly chart’s Descending Wedge breakout target of 0.90.

Bearish targets: Any bearish 4hr chart triangle breakout would bring 0.77 back into focus. After that, watch whole-number levels on the way down to 0.65 as this is near the 61.8% Fibonacci of the March 2020 – Feb 2021 swing High move.

  • Watch 0.78 and for any new 4hr chart triangle breakout:

 

 

 

AUD/JPY:  The AUD/JPY closed with a bearish-coloured Spinning Top weekly candle but recovered the week to close back above the key 85 level. Recall, last week’s close above 85 was significant as it was the first weekly close above this resistance since early February 2018!

As noted over recent weeks:

  • The weekly chart reveals that the 85 level has been a significant reaction zone for the AUD/JPY and has been resistance for the last three years; this level was peppered many times throughout 2018 but could not be broken. The next major level above 85 is 90 so watch this target level if 85 is broken.
  • AUD/JPY traders also need to keep an eye on the sentiment with stocks though, especially the S&P500 index, as the two are generally highly aligned; as the chart below reveals. Any pause or serious pullback with stocks might render similar for the AUD/JPY:

 

AUD/JPY versus S&P500 (gold line): a high degree of positive correlation:

 

There are revised 4hr chart trend lines to monitor for any new breakout. Keep in mind, though, if stock sentiment continues to sour then the 85 level could be one to monitor for any new weakness with the AUD/JPY.

Bullish targets: Any bullish 4hr chart triangle breakout would bring 85.50 into focus followed by whole numbers on the way up to 90 S/R.

Bearish targets: Any bearish retreat below 85 would bring the 14-month support trend line into focus. After that, watch whole-numbers on the way down to 76 as this is still near the recently broken 7-yr bear trend line, and then 70 as this is now near the 61.8% Fibonacci of the March 2020 – March 2021 swing High move.

  • Watch 85 and for any 4hr chart triangle breakout:

 

 

 

 

NZD/USD: The Kiwi closed with a bearish-coloured Hanging Man-style weekly candle and still just below 0.73 so this remains the level to watch for any new make or break.

There are also revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish 4hr chart triangle breakout would bring 0.73, 0.74 and 0.75 back into focus.

Bearish targets: Any bearish 4hr chart triangle breakout would bring 0.72, 0.71 and 0.70 into focus followed by the monthly 200 EMA and 0.69. After that, watch whole-number levels on the way down to 0.63 as this is near the 61.8% Fibonacci of the March 2020 – Feb 2021 swing High move.

  • Watch for any 4hr chart triangle breakout:

 

 

 

GBP/USD: The Cable closed with a bullish weekly candle and just under 1.41 making this the next horizontal resistance level to watch for any new make or break. Price action broke up and out of a 4hr chart triangle early last week making for a great trend line breakout opportunity trade that gave up to 230 pips!

As per last week: the recent breakout from a multi-week sideways consolidation triangle is giving the daily and weekly charts the appearance of a Bull Flag breakout.

NB: The longer-term target for any bullish continuation above the previously broken 14-yr trend line, noted here in my article on December 20th, is the monthly chart’s 61.8% Fibonacci, near 1.75. Price action at the initial breakout was around 1.35 and has reached up as far as 1.42, a move of 700 pips, so this trend line breakout was a great clue about things to come and the target for this move has not even been reached yet!

Bullish targets: Any bullish 4hr chart triangle breakout would bring 1.42 and the recently broken 14-month support trend line into focus followed by whole-number levels on the way up to 1.50 as this is a previous S/R region on the weekly chart. Any bullish continuation after that would bring whole-number levels on the way up to 1.75 into focus.

Bearish targets: Any bearish 4hr chart triangle breakout would bring 1.40 into focus. After that, watch whole-number levels on the way down to 1.25 as this is near the 61.8% Fibonacci of the March 2020 – Feb 2021 swing High move.

  • Watch 1.41 and for any new 4hr chart triangle breakout:

 

 

 

USD/JPY:  The USD/JPY closed with a bullish weekly candle but remains in a consolidation-style 4hr chart triangle under the 110 level.

NB: The bullish weekly-chart descending wedge breakout was first noted in my article of January 31st. Price action at the initial breakout was around 104.5 and has reached up as far as near 111, a move of around 650 pips, so this trend line breakout was a great clue about things to come!

Bullish targets: Any bullish 4hr chart triangle breakout would bring 110 into focus. After that, watch whole-numbers on the way up to 115.

Bearish targets: Any bearish 4hr chart triangle breakout would bring 108 and 107 into focus.

  • Watch for any new 4hr chart triangle breakout:

 

 

 

GBP/JPY: The GBP/JPY closed with a large, bullish weekly candle and just above 154 making this the level to watch for any new make or break. Price action broke up and out above 152 early last week making for a great trend line breakout opportunity trade that gave up to 200 pips!

NB: The longer-term target for any bullish continuation above the previously broken 40-yr trend line, noted in my post of January 3rd, is the weekly chart’s 61.8% Fibonacci, near 170. Price action at the time of this breakout was near 141 and has reached up as far as 153, a move of around 1,200 pips, and so is another trend line breakout that has proven to be worthwhile monitoring.

There are revised 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish 4hr chart wedge breakout would bring 155 into focus. After that, watch the 21-week support trend line followed by whole-number levels on the way up to the weekly chart’s 61.8% Fibonacci, near 170.

Bearish targets: Any bearish 4hr chart wedge breakout would bring 153 into focus. After that, watch whole-number levels on the way down to 135 as this is near the 61.8% Fibonacci of the March 2020 – March 2021 swing High move.

  • Watch 154 and for any new 4hr chart wedge breakout: