Will the Light News Week Facilitate Range Trading?

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Last week, we warned that dollar’s downside correction to its two-month advance was not over.  It slipped further against the euro, yen, and sterling, while it strengthened against the dollar-bloc currencies.  The outlook remains mixed for the week ahead, making it difficult to discuss the dollar in general.   

The Dollar Index is heavily weighted toward the complex of European currencies.  Two of the US main trading partners, China and Mexico, are not even included.  Yet it frequently is used as a broad gauge of the greenback.  The recent pullback saw it push through the 38.2% retracement of the rally (93.55) that began from the year’s low set on September 8 (~91.00).  

The Dollar Index finished the week a marginally above the 100-day moving average (~93.65).  The lower Bollinger Band is found near 93.50.  The technical indicators on the daily bar charts still warn of downside risks, and the five-day moving average has fallen below the 20-day for the first time since late September.  The 50% retracement is seen near 93.10.  The weekly technical studies lend support to our view that the pullback is corrective in nature.

In the middle of last week, the euro climbed to approach the $1.1860-$1.1885 area, which corresponds with retracement objectives.  Also, importantly that area marks the October high that was also part of a larger topping pattern.   Following the mid-week reversal (shooting star candlestick) the euro had a shallow pullback, finding support at near the five-day moving average, which it has not closed below since November 8.  A move below that moving average (~$1.1765) could be among the first signs to confirm a near-term high is in place.  The upper Bollinger Band is near $1.1835.  The US two-year premium continuing to trend higher against Germany, which was not the case during the late April through early September euro rally, and this makes us hesitant about getting enamored with the euro.

US 10-year yield backed off from the 2.40% area, and this helped keep the dollar under pressure against the yen.  A nearly 1.3% drop, saw the dollar plumb the lowest level since mid-October ahead of the weekend.    The daily technical studies warn that the low is not in place.  There is a band of support extends toward JPY111.65, which the greenback is poised to test.  Additional support is seen near JPY111.00.  A move back above JPY113.00 would help stabilize the tone.

Sterling remains mired in a two-month trading range between roughly $1.30 and $1.3320.  It recorded a two-week high near $1.3260 before the weekend.  The technical indicators appear constructive, but we suspect it is not going anywhere quickly.  Brexit talks remain at an impasse as both sides want the other to compromise.  The weekly technical indicators continue to favor an eventual downside break.  The euro was repulsed again near GBP0.9000. Initial support near GBP0.8930 was frayed but provided it holds, another run at the highs cannot be ruled out.

Helped by a widening two-year interest rate differential the US posted an outside up day against the Canadian dollar.  The greenback’s 1% gain recouped the previous two weeks of losses.  It toyed with the CAD1.2820 area but was unable to establish a foothold above it, which would target another big figure move that would carry it to last month’s high.   The technical indicators appear consistent with the continued recovery of the US dollar.

The Australian dollar can’t get out of its own way.  It has declined in five of the past six sessions.  The slump before the weekend brought it to its lowest level since June.  It is within spitting distance of the 61.8% retracement of this year’s gains (~$0.7530).  A note of caution comes from its push through the lower Bollinger Band (~$0.7550).  The weekly technical studies show the risk is still to the downside, though the daily technicals are getting stretched.

The January 2018 light sweet oil futures contract snapped a five-day slide with a 1.9% advance before the weekend.  News that Saudi Arabia energy minister endorsed the call for an extension of the output cuts may have helped spur the recovery.  OPEC meets at the end of the month.  The gain was insufficient to avoid breaking the five-week rally that had carried the contract from about $49.75 to nearly $58.15.  The pullback bottomed near $55.00 on November 14.  It consolidated until the pre-weekend recovery.   A band of resistance in the $56.60-$$57.00 area needs to be overcome to signal a test on the highs.  The technical indicators warn that the corrective phase may not be complete.

The US 10-year yield was turned back the 2.40% area.   It has been stuck largely between 2.30% and 2.40% this month.  The risk is that yields fall further.  Indeed, there appears to be a head and shoulders pattern in the yields, with a neckline just above 2.30%.   A break warns of a move toward 2.10%.  Since people buy a bond at a price rather than a yield, insofar as technical analysis is about group psychology, it is often preferable to conduct the technical analysis on the prices.

The head and shoulders pattern on the December note futures may not be as aesthetically pleasing, but it is there too.  The neckline is found near 125-11 at the start of the new week.  If convincingly penetrated, the pattern projects toward the late September highs a little above 126-00, which would bring it to the 50%-61.8% retracement of the sell-off that from the year’s high recorded in early September.

 

The S&P 500 eased in the first half of the week and closed below the 20-day moving average on November 15 for the first time since late-August.  It gapped higher the following day.  The 0.82% rally on November 16 was the largest gain since September 11. However, without follow through buying ahead of the weekend, the S&P 500 finished marginally lower on the week.  It is the first back-to-back loss in three months.The technical indicators do not give one much confidence at the moment, though the S&P 500 is less than 1% from the record high.

The Russell 1000 Value Index continued to diverge from the Russell 1000 Growth Index.  It is not that the Growth Index is rising faster than the Value Index.  For the last four weeks, the two have been moving in opposite directions.  The Value Index fell for the fourth consecutive week and five of the past six weeks. The Growth Index extended its advancing streak for an eighth consecutive week, though over the past two week’s the cumulative gain is a paltry 0.08%.    The Russell 1000 Growth Index is up nearly 25% year-to-date, while the Russell 1000 Value Index is up 6.35%.