Last week closed with new all-time highs for most equity indices despite mixed signals coming from the consumer inflation figure which remained in line with expectations whilst manufacturing inflation figures show a continued rise in commodity costs.
There was an increase in demand for consumer goods in the US as consumers spent their savings. Once these savings are depleted, consumer demand will be affected by income and the ability to obtain credit. But their purchasing power is now decreasing because inflation exceeds income growth. This, sooner or later, will limit the possibility that the increase in demand will raise prices indefinitely.
The reaction of global stock indices to rising inflation has so far not dented the bullish mood. Now we will see whether or not we have reached the end of this long uptrend.
The S&P 500 stock index, which is relatively heavily weighted in shares of financials, energy companies and other economically sensitive companies, is up 5.5 percent from last month’s lows. By doing so it outperformed its peers by more than a percentage point in a rally that accelerated over the past week. The value index is up 18% this year despite stalling after a good start to 2021.
The move could anticipate a comeback for the so-called “reflation trade,” a bet on a rebound in economic growth that has seen value stocks rise since late last year along with Treasury yields.
The rebound in value stocks comes as investors digest last week’s data showing a potential spike in inflation as they look ahead to the Federal Reserve’s Jackson Hole symposium later this month. That event, or the central bank’s next policy meeting in September, could offer hints about when it will begin winding down the $120 billion-a-month government bond-buying program that has helped support asset prices.
Next week, the monthly US retail sales report and earnings from retailers such as Walmart and Target could shed light on consumer health.
China’s industrial production and the European Union’s GDP and consumer inflation figures should also be followed.
We have now reached mid-August and the stock markets have touched significant highs or all-time highs. This is a particularly important time of the year because if the equity markets were about to start making a descent, they may have made a period high if not an annual high. The S&P500 index might not go below the 4340-4317 area; otherwise the trend may reverse on a weekly basis. However, watch out to any increase in volatility and volumetric increase because summer sell-offs are sharp and fast.
Also this week we return to the scenario of recording lows between Monday and Tuesday and then recording further highs in Friday’s close. Unless we see a strong sell off with large daily hikes, no weekly trend change should be possible. If it does take place, pay close attention to the extent of the retracement in the first few days of the week.
DE30 – On Wednesday the German index broke 15,794 points and after 4 months we finally have new all-time highs. The first annual target in the 15,900 area was reached including 16,000 points on Friday. Next target could be 16,200 and 16,500 in extension.
The 15,822-15,825 area is a first support. Above it, the area 16,014-15,975 represents the area to new historical highs and from where we can see corrections. Weekly support could be in the 15,761 area and then the 15,717-15,690 area, below which we can observe a major price reversal.
Intermediate support can be found at 15,631 while key support might be in the 15,501-15,545 area, under which the trend can start a new bearish path.
Below this, we check for 15,332, 15,216-15,176 and 15,119-15,071-15,043. All these levels are optimal entry levels if you are looking for buying opportunities.
Below 15,043 points, a vertical fall could be interpreted as a probable new downtrend. We always watch the volumetric supports 15,017-14,981 and 14,842-14,804. The loss of these last two areas opens to new lows with the first target in the 14,600-14,441 area.
US30 – After the excellent consumer inflation figure, investors bought strongly into stocks linked to economic performance causing a break of 35,200 points and reaching our target 35,500 at Friday’s close. Next level to be reached could be 36,000.
The price rose rather vertically marking two new support zones 35,312-35,254 and 35,449-35,404. These zones are excellent for new purchases but we will have to check they hold in case prices fall further. 35,056-35,152 will be our weekly support.
Next supports can be found at 34,985-34,941, 34,889-34,841 and 34,755-34,701.
Below 34,985-34,941, we might have the possibility of a correction with targets in the areas mentioned above. In particular, watch for 34,755-34,701. Below this, we could see a strong bearish acceleration but only in case of strong sell off and increased volatility.
The bullish reversal of three weeks ago was very fast. From 34,535 onwards, we have a lot of support up to the zone of 33,980-33,725 given the very high amount of buying of value stocks by investors. We highlight the 34,295-34,267 area and the same 33,980-33,725, the latter being a key support for the medium-term uptrend.
Some important bearish signals might come if the price goes below 33,686. Key level remains at 33,608. Following support set at 33,215 and confirmed 32,956. The latter should be monitored as its loss could lead to fast and new bearish pressures.
Entry level for purchases can be the supports at 32,761-32,638 and 32,308. The strong buying zone created weeks ago at 32,308-32,137 is confirmed. Only below it, could we witness stronger bearish pressures with possible weekly trend changes.
IMPORTANT NOTE: We are entering one of the least liquid weeks of the year so low volumes should keep us focused as it can be a sign of weakening of the US stock market. This situation is typical before flash crashes. If the crashes are high in intensity we should be careful before buying. The target of the S&P500 index, 4,400 was reached and if there is no reversal, we might reach the 4,500-4,600 area in the next few weeks. Watch out for the 4,340-4,379 area which is a weekly support.
Also, this week it is wise to take note of Monday’s openings and Friday’s closings to have a confirmation or denial of the current trend. Avoid overtrading and watch out for volatility imparted by HFTs. To mark eventual gaps that can appear also during the week with particular attention to those of Monday. If any falls at the beginning of the week are quickly recovered, there will be no problems in the uptrend. Conversely, favour the short.
Have a good trading week!
Research provided by Giancarlo Prisco
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