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First signs of weakness in DJ

DJ chart 4h 08 18

Is the uptrend in US equities soon over? Fed Minutes hinted that future rate hikes could hurt the economy (more on this later in this report) but is that going to turn the market lower? Here’s how I seek to determine what is likely to take place. I look for long trades whenever the markets are trending higher and short trades when markets are trending lower. It means that occasionally the market moves against me but most of the time I am trading with the institutional order flow. Yesterday was the first time in a while that long trade signals in the major equity indices didn’t perform that well. It was tricky to trade the long side which is one of the first signs of markets (possibly) being nearing the end of the current uptrend. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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Dow (DJ) created a lower swing high in the 4h chart and Nasdaq (NAS) remained weak the whole day. Over the years I’ve often seen how Nasdaq sometimes gives good indications on what’s likely ahead in the stock markets. Lately, when the technology index has become stronger than Dow the latter has soon followed the lead (and vice versa). Now we are seeing NQ turning weaker which suggests that the recent bull run in stocks might be over.

When at the same time we have commodity currencies selling off it’s an additional red light that suggests the markets are moving into a phase where risk aversion is more prevalent than readiness to accept risk. While I’m not saying the equity indices will now definitely sell off, all this makes me careful with these markets. In practice, this means I will start to look for further evidence of market weakness and start to look for reasons to either trade ranges perhaps even start to look for short trades.

DJ chart 08 18

Technically DJ is still in an uptrend until the 33820 support is decisively violated. The level coincides roughly with the channel low and 23.6% retracement level and the 2h SMA(50). Above the level, the market either stays in an uptrend or ranges between 33820 and 34285. Below the level, we could see the market trading down to 33500 – 33600 region.

DAX chart 08 18

DAX – The German stock market took a much bigger hit yesterday. The index lost three days’ worth of gains in one single day! The sell-off took DAX down to the 13631.50 support level that roughly coincides with the channel low and the 38.2% retracement level and the SMA(50). Such an increase in downside momentum makes it, in my experience, unlikely that the market could rally above the most recent high (13974.40). Therefore, I expect there’s a higher probability that DAX trades down to 13460 or so before it can penetrate the 13974.40 high.

Gold chart 08 18

XAUUSD – Yet another gold target hit! Two days ago I noted how gold was trading at a bull channel low but could break below the channel. I expected the break would be likely to move gold to 1765 or so. This target was hit yesterday. The market has been weak since it started wedging last week and broke my key support level at 1784. 

My focus is now on the 4h downtrend and I, therefore, look for shorting trades in this market. The nearest key resistance levels I focus on are 1767.48 and 1771.36. I look to sell rallies to these levels but only if price action justifies the idea.  For targets, I focus on key support levels 1759.80 and 1754.24.

FOMC Minutes

Fed bankers see that they need to keep hiking rates in order to lower inflation, but they were also cautious when it comes to the pace of future increases. The pace of rate hikes this year has been the fastest since the 1980s. The Fed officials expressed concern that if price pressures have spread more broadly through the economy the Fed might have to hike more than expected (by the markets). The Minutes revealed also that Fed is also worried the hikes could end up being too aggressive as there’s always a delay between the hikes and their impact playing out in the economy. 

US Retail Sales

Americans continued to spend at stores, online and in restaurants even though the measure came in below expectations and was flat in July. At the same time, June number was revised 0.8% higher.But if we look at US consumer spending without gasoline and auto sales, there was an increase of 0.7% from June. Shoppers were still able to spend although much of the spending took place online.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US inflation rate for June (YoY) dropped more than expected. The July reading came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

  • USD Philly Fed Manufacturing Index
  • USD Unemployment Claims
  • USD Existing Home Sales
  • USD FOMC Member George Speaks
  • NZD RBNZ Statement of Intent
  • GBP Retail Sales m/m
  • CAD Core Retail Sales m/m
  • CAD Retail Sales m/m

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta

Chief Market Analyst

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