DAX Forecast: Looks for Base After Pullback
- The German DAX has rallied just a bit during the early hours on Thursday as it looks like we are trying to recover a bit.
- The 18,000 euros level is an area that obviously will attract a lot of attention due to the fact that it is a large, round, psychologically significant figure, but it’s also an area where we have seen some noise previously.
- The market at this point in time continues to see the 50 day EMA underneath as potential support.
- In this type of environment, I think we continue to see a lot of consolidation as we try to sort out which direction we are going in the longer term.
Trend is Still Positive
The DAX is bullish overall, but I think also this is a situation where if we can break the candlestick from the last couple of days then we could go looking to the 18,500 euro level. Underneath the 50-day EMA there is a lot of support that we’ve seen recently so I’m not interested in shorting this market anytime soon.
That being said, the 17,500 level is an area that I think a lot of people will be paying attention to because if we were to give that up, then the uptrend could be threatened. Keep in mind the DAX is the gateway to Europe for most traders so they will look to it as a place to put money to work initially. In that sense, you can look at the DAX as a harbinger of what happens on the rest of the continent such as trading in the MIB in Italy or the AMX in Amsterdam etc. At this point it looks like we’re trying to beat back some of this negativity, but I think we’ve got some choppy and volatile days ahead
When you get this type of choppy volatility, you are better off using small positions, but given enough time I do think that we continue to see an attempt to rally. If we don’t rally in this market, and start to break down, then the real trade would be to short some of the smaller European indices.
S&P 500 Forecast: Continues to Consolidate (SIGNAL)
- Potential signal: if we break above the top of the wipeout candlestick from Tuesday, near the 5140 level, I would be a buyer and go looking toward the 5275 level. Underneath, the 5000 level would be my stop loss.
- Ultimately, this is a market that I do think has a lot of support underneath it, but the 5000 level is an area that I think he is psychologically important as well as potentially structurally supportive as well. In fact, I think it’s an area of support that extends down to the 4925 level.
The 50-Day EMA sits just above, offering a certain amount of resistance. If we were to break above there, then the market is likely to go looking toward the 5125 level. Breaking above that level opens up the possibility of a move toward the 5300 level, but we would need to see some type of momentum in the market. That being said, it’s probably only a matter of time before Wall Street finds a reason to start pushing a bullish narrative again.
Interest Rate Markets and Jobs
Friday is the nonfarm payroll announcement, and that of course will have a major influence on what happens next. Ultimately, which you need to watch is interest rates coming out of the 10 year note in the United States, because that’s the only thing that Wall Street cares about, whether or not it is going to get cheap money. This has absolutely nothing to do with the economy, because as an American I can tell you that things are getting rapidly more expensive. Wall Street is worried about getting cheap money to push around and take advantage of liquidity.
This is a bit ironic, considering we are in the midst of earning season, but quite frankly earnings have nothing to do with what happens with the stock. That’s like assuming that stocks have something to do with the economy. It’s a transmission of liquidity like it has been since the Great Financial Crisis. This is a market that is currently trying to sort out whether or not it has enough liquidity to support it. If it does, it will rise. If it does not, it will fall. At this point, I think the only thing you can count on is a lot of noise.
Nasdaq 100: Sandwiched, Watch US 10-Year Treasury Yield Next
- Nasdaq 100 has exhibited short-term intraday wild gyrations of 3% to 4% in opposite directions since last week.
- Today’s data focus will be on US non-farm payrolls and ISM Services PMI for April to offer clues on whether the stagflation risk narrative is still alive.
- Macro factors such as the movement of the US 10-year Treasury yield are likely to take over the driver’s seat over micro factors (earnings results) in the next two weeks.
- Key levels on the US 10-year Treasury yield to watch are 4.70% (above, likely to be bearish for Nasdaq 100) and 4.58% (below, bullish bias for Nasdaq 100).
Since our last publication, the Nasdaq 100 has continued to inch lower from its current all-time high level of 18,465 printed on 21 March 2024. It has just ended April with a monthly loss of -4.46%, its worst monthly performance since September 2023 after its prior five consecutive months of positive returns.
So far it has recorded a maximum drawdown of -8% from its current all-time high to the recent 19 April 2024 low of 16,974, and current episodes of minor rebounds in price actions have been rejected by the downward slopping 20 and 50-day moving averages; the hallmark of a potential on-going medium-term corrective decline sequence within its longer-term major uptrend phase.
On a shorter-term intraday basis, wild gyrations between a range of 3% to 4% in opposite directions have been seen on the Nasdaq 100 due to several significant risk events, and data releases that unfolded this week, two of the “Magnificent 7 group of mega-cap US stocks earnings results (Amazon and Apple), US ISM Manufacturing PMI, US Treasury refunding requirements, and the FOMC monetary policy meeting.
These events and data sets offered conflicting signals on the state of the US economy; stagflation risk is still alive but negated by the Fed’s upcoming Quantitative Tightening (QT) taper initiative to kickstart in June where the monthly amount of US Treasuries roll-off in the Fed’s balance sheet will be reduced to US$25 billion from US$60 billion.
Hence, the QT taper initiative has offered a relief to potentially cap any adverse liquidity squeeze in the US financial system that can trigger a spike in short-term and overnight interest rates as a lesser amount of banks’ reverses may be needed to fund the US Treasury general account (TGA) as the amount in the Fed’s overnight reverse repos facility (the primary source of funding for TGA replenishment since September 2023) has dwindled to almost zero (US$428.68 billion as of 2 May 2024) from a peak of US$2.55 trillion in December 2022.
Watch US NFP & ISM Services PMI for more clarity on the state of the US economy
There will be two more key pieces of economic data to digest before we end this hectic and volatile week, US non-farm payrolls for April where there may be a risk of upside surprise as consensus expectations have been lowballed to +181K jobs added after a surprise rosy print of +232K jobs in March. April’s ISM Services PMI on the health of the US services sector will be out later; still in an expansionary mode (above 50 reading) but the pace of expansion has slowed since the start of the year with last month’s March print of 51.1 versus 53.4 seen in January. If April’s number comes in below expectations of 52 and March’s 51.1, the stagflation risk narrative is likely to gain traction again.
US 10-year Treasury yield may dictate Nasdaq 100’s next intermediate moves
A clearance above 4.70% resistance on the US 10-year Treasury yield (inverted) may trigger another potential downleg in the Nasdaq 100 with its key medium-term support zone coming in at 16,560/290 (also the 200-day moving average).
On the flip side, a break below 4.58% near-term support on the US 10-year Treasury yield (inverted) is likely to see a continuation of the rebound on the Nasdaq 100 from the19 April 2024 low to expose the next intermediate resistance at 17,900
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