Market Insight for the Week Ending 17 February

Major US equity indices hit the pause button in recent trading; both the S&P 500 and the Nasdaq Composite put a cap on back-to-back winning streaks last week and erased 1.1% and 2.4%, respectively. This represents the largest one-week decline since December 2022. Out of the 11 S&P 500 sectors, energy stocks were the only outperformer on the week, adding 5.0%. Notable laggards were communication services stocks, erasing 5.6%, followed by consumer discretionary, down 2.1%.

A prominent event on the week, of course, was the Reserve Bank of Australia (RBA) increasing rates for a ninth consecutive time on Tuesday, lifting the Cash Rate by 25 basis points to 3.35%. This was shortly followed by the US Federal Reserve Chair Jerome Powell’s participation at the Economic Club of Washington DC during US trading. The Fed Chair emphasised a dovish vibe at the beginning of his time in the limelight, with mention of disinflation which stoked bullish sentiment.

However, Powell also aired a hawkish stance, cautioning that benchmark rates may have to be increased beyond what was initially thought. This hawkish tone was later echoed by Fed members Williams and Cook, consequently guiding equities lower and Treasury bonds north. On the week, nevertheless, US Treasury yields increased across the curve, resulting in the 2s10s yield curve inversion increasing to -0.78% as fears grow that the Fed would need to push the economy into recession to control inflation.

The focus heading into European trading on Friday was UK growth data. The preliminary Q4 release registered unchanged at 0.0% (this means the country showed ZERO growth in this time period), following a revised 0.2% decline in the previous quarter. This, technically, means the UK economy narrowly missed entering a technical recession. As a reminder, the Bank of England’s (BoE) recent forecast noted that the UK economy is on course for recession, yet it is likely to be shallow.

Shifting attention to a fresh week of trading, the economic calendar features a number of key events to be mindful of. This includes the latest US inflation rate on Tuesday as well as Wednesday’s retail sales data and manufacturing prints. Following the bumper NFP release earlier in the month and the recent hawkish language from Fed members, the noted risk events will be widely watched in the markets this week. Across the pond in early European hours, Wednesday also welcomes the latest UK inflation data, which will equally be widely watched as traders prepare for 23 March BoE rate decision.

Economic Radar This Week

Monday 13 February

Yearly Swiss Inflation Rate for January at 7:30 am GMT

Inflation in Switzerland softened to 2.8% (YoY) in December from 3.0% in the previous two months. Economists estimate a further slowing for January to 2.7%.

Tuesday 14 February

UK Unemployment Rate for December at 7:00 am GMT

Following the UK narrowly avoiding recession, according to last week’s quarterly GDP number, UK unemployment is expected to increase to 3.8% from the previous 3.7% reading.

Annual Inflation Rate for the US for January at 1:30 pm GMT

Consumer prices in the US have eased for six successive months, with economists estimating a seventh consecutive slowdown in prices to 6.3% in the 12 months to January.

Wednesday 15 February

Annual Inflation Rate for the UK for January at 7:00 am GMT

The consensus heading into the event calls for a third consecutive easing of consumer prices to 10.3% in January, following December’s 10.5% rate.

Month-Over-Month US Retail Sales Data for January at 1:30 pm GMT

Expectations heading into the event call for an increase in retail sales in January, increasing by 1.6% following December’s -1.1% print.

US New York Empire State Manufacturing Index for February at 1:30 pm GMT

Markets are anticipating a better-than-previous release at -17.75 for February, following January’s -32.9 reading. The forecast range, however, resides between a low of -10.0 and a high of -25.0.

Thursday 16 February

US Building Permits (Preliminary) for January at 1:30 pm GMT

Building permits out of the US are anticipated to show a slight increase to 1.374M for January from December’s 1.337M.

Friday 17 February

Month-Over-Month UK Retail Sales Data for January at 7:00 am GMT

Serving as a key gauge of consumer spending, monthly retail sales data for the UK is anticipated to print -1.8% for January, following December’s -1.0% number.

Technical View for the Week Ahead

US Dollar Index

Week to date, the US dollar added 0.6% according to the US Dollar Index. Month to date, gains for the index has also eclipsed January’s losses, up 1.5% and on track to snap a four-month bearish phase.

Although clipping the lower boundary of the monthly decision point at 101.30-103.91, this unearths a potential dip-buying scenario in a market trending north since early 2008. An obvious upside objective residing on the monthly scale, one that offered sellers a technical ceiling to work with in Q4 of 2022, is the ascending channel, taken from the high 103.82. Failure to build on recent gains, nonetheless, reopens the risk of a return to monthly Quasimodo resistance-turned potential support from 99.67, closely shadowed by two Fibonacci ratios just south of 100.00.

Against the backdrop of monthly price action, the immediate test for bulls in this market is the descending channel resistance on the daily timeframe, extended from the high 107.99. Adding to this, the daily Quasimodo support-turned resistance at 103.76 is in view that is aided by resistance out of the Relative Strength Index (RSI) between 60.00 and 50.00. As you can see, the neighbouring 50-day simple moving average at 103.48 failed to create much of a headwind last week. Assuming a break of the descending channel resistance this week, medium-term forecasts see the buck taking aim as far north as daily Quasimodo resistance from 104.86.

Trend structure on the daily chart, however, remains on the side of sellers for the time being, despite price closing north of the 50-day simple moving average. This is shown through the recent Death Cross. Fashioned through the 50-day simple moving average crossing under the 200-day simple moving average (106.46), this signals the potential for a major trend reversal (though this is a lagging indicator and reflects past price movement).

In addition to this, since establishing a peak at 114.78 in late September, a series of lower lows and highs materialised (traditional bearish trend structure). It will only be once a decisive higher low occurs and a subsequent higher high would I consider the daily timeframe to be trending north—admittedly a push through the daily descending channel adds weight to a trend reversal to the upside.

Direction

As a whole, I feel the greenback is approaching a critical technical juncture right now in the daily descending channel resistance. A rejection supports the daily chart’s bearish trend and could turn things in the direction of daily demand at 100.27-100.77; movement north, nevertheless, shines light on further buying on the monthly scale from the decision point at 101.30-103.91 with the possibility of daily resistance emerging around 104.86.

EUR/USD

It was another week of red for Europe’s common currency last week, shedding more than 1.0% versus the US dollar. For those technically aware, this should not surprise. In the recent Weekly Market Insight on the weekly timeframe, I noted the following (italics):

The key technical development on the weekly timeframe last week was the formation of a shooting star. The individual bearish candle configuration, as you can see, also shares chart space with weekly Quasimodo support-turned resistance at $1.0888. This, coupled with the possibility of a long-term sell-on-rally scenario developing, adds weight to a bearish scene unfolding here.

In other words, the pullback off the late September lows (2022) at $0.9536, in a market trending south since 2021, might be viewed as a sell-on-rally opportunity. $1.0888, consequently, will be a key watch this week as rupturing this base undermines a bearish showing and unearths fresh weekly resistance as far north as $1.1174.

As evident from the weekly scale, additional underperformance did indeed surface last week. Meanwhile, adding to the bearish vibe, not only did price action on the daily timeframe voyage through trendline support, extended from the low $0.9730, Friday cruised below the 50-day simple moving average at $1.0705, a move bringing to light familiar support at $1.0602. Testing and clearing the aforementioned support this week paves the way for further selling to daily support at $1.0412, a level complemented with the nearby 200-day simple moving average, currently trading at $1.0321.

In terms of trend, the daily chart has chalked up a series of higher highs and higher lows since rebounding from daily support at $0.9573 (and weekly support at $0.9606). Additional trend confirmation is visible through price crossing above its 200-day simple moving average as well as a Golden Cross presenting itself early this year (50-day simple moving average crossing above the 200-day simple moving average).

We can also see that the 200-day moving average is starting to level off from its down move: another sign of a potential trend reversal to the upside. Having wrote this, however, daily price closing under the 50-day simple moving average, as well as under trendline support and the Relative Strength Index (RSI) cementing position below its 50.00 centreline (negative momentum) certainly questions buyers’ health. Consequently, if $1.0602 is tested, this will be a KEY watch this week.

Direction

Looking ahead on the H1 timeframe, Quasimodo support from $1.0667 is an interesting location as breaching this boundary unmasks support at $1.0635 and the $1.06 figure. The latter remains the key downside target for sellers this week, according to the bigger picture. As a result, a H1 close sub $1.0667 or a retest at the underside of $1.07 in early trading may prompt additional selling to eventually reach $1.06.

S&P 500

Across the board, major US equity indices finished the week on the ropes. Aside from the Dow Jones Industrial Average—which chalked up its second week marginally in the red—the Nasdaq Composite and the S&P 500 put a cap on back-to-back weekly gains.

Down 1.1% on the week, the S&P 500 is now carving out a noticeable upper candle shadow on the monthly timeframe. Of technical relevance on the monthly scale, I noted the following in the previous Weekly Market Insight (italics):

The monthly chart has remained in a dominant uptrend since early 2009. We had two notable corrections in that time, one in early 2020 (COVID), dropping 35%, and one in play since early 2022 (27% from 4,818, as of writing) which was accompanied by negative divergence out of the Relative Strength Index (RSI).

Before buyers can change gears, the weekly timeframe has thrown a spanner in the works in the form of a Quasimodo resistance at 4,177. As you can see, this level welcomed selling last week and opened the door for a return to a recently breached trendline resistance (taken from the high at 4,818). At the same time, though, I want to point out that the RSI ventured above the upper boundary of an ascending triangle between 53.72 and 30.47 and ended the week poised to retest the breached boundary to form possible support ahead of the 50.00 centreline.

It was also noted in recent analysis that the RSI pattern breakout emphasises positive momentum until reaching the overbought threshold (70.00). While these triangles are generally found in uptrends, they can also shape reversal signals.

Supporting the possibility of selling this week is the daily chart demonstrating a lack of bids around support at 4,087, which is now a marked resistance. I see limited support on the daily timeframe until the 50-day and 200-day simple moving averages, trading at 3,969 and 3,944, respectively, followed by a 38.2% Fibonacci retracement ratio at 3,927. If we see daily price reclaim 4.087 to the upside this week, the first port of call for buyers is the 4,195 2 February high.

Finally, moving across to the H1 timeframe, the technical framework casts light towards resistance at 4,093 and a trendline support, extended from the low 3,803, accompanied by a number of Fibonacci ratios and, perhaps most importantly, an alternate AB=CD 1.272% Fibonacci projection at 4,042.

Direction

Having noted that the bigger picture (weekly and daily charts) demonstrates scope to nudge lower, whether the aforementioned H1 supports will be enough to hold back sellers is questionable and could unlock the door back to as far south as support from 3,950 on the H1 which joins hands with the daily timeframe’s simple moving averages (the downside targets on the daily timeframe).

XAU/USD (Gold)

Following its largest one-week fall since July 2022 (down 3.0%), follow-through selling failed to surface last week for spot gold, spending the week ranging between $1,890 and $1,852 at the prior week’s session low. Overall, technical studies still suggest bears have the upper hand in the weeks ahead.

Having noted the Relative Strength Index (RSI) rejected the lower side of overbought conditions (70.00) and is nearing the 50.00 centreline, the capacity for further weakness is seen until support at $1,807 enters the fight on the weekly chart. Buyers making a stand at current prices, nonetheless, could turn things in the direction of the prior week’s peak at $1,959.

Substantiating the possibility of additional underperformance is not only the RSI dropping through the 50.00 centreline, but also the bearish flag pattern (sometimes referred to as half-mast patterns) on the daily chart between $1,881 and $1,862. Thursday completed the pattern through a one-sided breakout lower, yet hit a brick wall by way of the 50-day simple moving average at $1,855. Overcoming this dynamic support this week reveals support at $1,828, with subsequent downside exposing the flag pattern’s profit objective at $1,768 and a neighbouring 200-day simple moving average at $1,776.

While the trend is still technically higher on the daily chart, the picture out of the RSI on weekly and daily charts as well as current price movement, shows buyers are lacking steam. Price crossing under the 50-day simple moving average this week would help corroborate the downside bias and, as noted above, expose daily support from $1,828. The test for this market, therefore, remains at the daily support from $1,828.

Short-term price action on the H1 timeframe eventually respected the Quasimodo support-turned resistance at $1,879 and scrambled for Quasimodo resistance-turned support at $1,857, which, as you can see, held firm into the close. Below here, Quasimodo support warrants attention at $1,827, a level lining up with a 1.272% Fibonacci projection (alternate AB=CD pattern) at $1,824 and, of course, the daily support level mentioned above at $1,828.

Direction

It is all about the H1 Quasimodo resistance-turned support at $1,857 and 50-day simple moving average on the daily timeframe this week. Clearance of the H1 level and the daily chart’s 50-day simple moving average throws light on a bearish scenario towards daily support at $1,828. Respecting the noted support levels, on the other hand, questions the daily chart’s bearish flag pattern and shifts attention back to at least the H1 timeframe’s Quasimodo support-turned resistance at $1,879.

BTC/USD

Amid a crackdown on crypto in the US, Bitcoin settled the week 5.5% lower and, for now at least, ended hopes of reaching the weekly timeframe’s falling wedge (between $25,214 and $17,567) pattern profit objective at $25,698, closely trailed by resistance at $28,844. Should further downside develop this week, revisiting the upper boundary of the noted falling wedge is certainly an option. The Relative Strength Index (RSI) is also visibly pulling back on the weekly chart from 58.72 to perhaps welcome a retest of the indicator’s 50.00 centreline which could serve as support.

$21,924 support was marked in the crosshairs as a downside objective on the daily timeframe. Thursday’s one-sided 5.1% fall surpassed the aforesaid line and, on Friday, was revisited as resistance. The move was accompanied by the RSI elbowing under its 50.00 centreline (negative momentum). Consequently, neighbouring demand at $20,548-21,326 warrants consideration; a break of here potentially prepares the ground for the psychological support coming in at 20,000 and a nearby 50-day simple moving average at $20,242.

Trend direction on the bigger picture is currently offering conflicting opinions. The weekly timeframe remains in favour of sellers—yet to show a higher low and subsequent higher high to transition to an uptrend. The daily timeframe, on the other hand, is considered trending higher and last week’s correction may just be that: a correction within the uptrend which opens the door for dip-buying opportunities. Supporting the current uptrend, of course, is the Golden Cross that established last week: the 50-day simple moving average venturing above the 200-day simple moving average at $19,724.

Finally, across the page on the H1 timeframe, downside momentum decreased considerably after crossing under $22,000 late on Thursday. Recent movement also crossed swords with an area of support between $21,373 and $21,598, made up of a 1.618% Fibonacci expansion, a 1.272% Fibonacci projection and a Quasimodo resistance-turned support. The important thing to understand here is this support zone resides just north of demand noted on the daily timeframe at $20,548-21,326, therefore whipsawing beneath the H1 support this week should not surprise.

Direction

While bears are clearly in command for the time being, the H1 support between $21,373 and $21,598 will be monitored in early trading this week, together with nearby daily demand at $20,548-21,326. Technically, this could be a location dip buyers surface from, attempting to take advantage of the daily uptrend. However, given the weekly timeframe’s trend direction and the daily RSI taking on space below 50.00, conservative buyers will likely seek additional confirmation before pulling the trigger: the rebound from $20,548-21,326 to form a price close back above daily resistance at $21,924.

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