Equities, Gold, Yen Price Action Setups Ahead of FOMC, BoJ

2016-06-10 13:16:00

Talking Points:

- The next couple of weeks are going to bring some noteworthy risk-events to markets: Next week has FOMC on Wednesday followed by the Bank of Japan, and the week after brings the Brexit referendum.

- There are numerous markets showing interesting price action setups at the moment, and we look at four of those below in US equities, Gold and the Japanese Yen.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

Over the past three days we’ve been looking at the conundrum facing the Federal Reserve as they attempt to continue the rising rate cycle started at last December’s FOMC announcement. After that December move, the Fed was expecting to hike rates a full four times in 2016; which, when combined with the multiple pressure points already being seen in vulnerable Asian markets on top of the prolonged and continued weakness in Europe, presented a vexing picture for investors - creating chaos across financial markets to open 2016.

That chaos began to wane in mid-February after Chair Yellen’s Congressional testimony gave markets a dovish read towards Fed policy moving forward in response to the global tumult that had already been seen. This led to an out-sized risk rally that brought commodities back to life and ‘some’ equity markets back towards fresh highs. In March, the Fed extended this theme by dropping their expectation to two rate hikes from the previous expectation of four. This was like a cheap form of stimulus as the Fed didn’t do anything other than change their outlook and this provided an additional gust of strength to markets, fueled by an extremely weak US Dollar.

And coming into May with equities continuing to rally, the Fed began to give hawkish signals to markets that had extremely low expectations for Fed policy for the remainder of the year. And given that labor and inflation data hadn’t shown much improvement, it appeared as though the Fed was responding with hawkishness more from equity prices than actual trends in the underlying data; thereby speaking to the ‘Fed Feedback Loop.’ The Fed had said 2-3 rate hikes were expected this year while markets were looking for none; fully expecting the bank to continue providing loose monetary policy in order to prop up markets in the face of mounting global pressure. This built a considerable rally in the US Dollar that didn’t come undone until an abysmal Non-Farm Payrolls print all but ruled out a June rate hike with an extreme amount of doubt thrown on July.

Markets are primed for a big week of economic announcements as we hear from both the Federal Reserve and the Bank of Japan next week; and in the week following ,we finally get to the widely-waited-upon Brexit referendum. Below, we look at four of the more interesting price action setups as we near a week that could bring big moves across markets.

US Equities

There is some interesting divergence showing in American equity markets and we touched on this yesterday.

After rallying to fresh 2016 highs in April, the S&P 500 spent much of May trending lower in a bull flag formation as the Fed talked up the prospect of 2-3 hikes in 2016. But as it became more obvious that we likely wouldn’t be seeing a hike anytime soon, with investors anticipating the Fed’s dovish move in response to weakening underlying data, the S&P popped to another new high in early June after that abysmal NFP report, and is currently finding support at a ‘higher low’ area of resistance. Also of interest is a projected trend-line that had previously been resistance which is now showing up as near-term support.

Created with Marketscope/Trading Station II; prepared by James Stanley

But curiously, while the S&P is working on fresh highs, the Nasdaq 100 continues to build into a longer-term bearish formation. Since setting a new high in early December, the Nasdaq 100 has been setting a series of ‘lower-highs.’ That early-June rally that brought the S&P 500 to fresh highs merely brought the Nas100 into a down-ward sloping trend-line which happened to be confluent with the 23.6% Fibonacci retracement of the most recent major move.

So, while the S&P 500 is bullish, the Nasdaq 100 is showing bearish qualities. If we are truly looking at a turn in equities driven by a slowdown in US economic data, even in the face of continued loose monetary policy, we’d likely see the Nasdaq turn lower first as the tech-heavy index often suffers before more-established, blue chip names.

Created with Marketscope/Trading Station II; prepared by James Stanley

Gold

One of the markets that tracked expectations around the Fed in a relatively clean manner has been Gold. After the Fed went dovish in February, Gold prices popped in a considerable manner, breaking out of a two-plus year down-ward sloping trend-channel. And this considerable pop in Gold came after prices spent much of December building a rigid base of support.

And as we came into the month of May, seeing multiple Fed members talk up the prospect of higher rates and further fueling that USD-rally, Gold took a considerable hit, dropping from over $1,300 to find support at $1,200 during the month. But as it became more obvious that a hike was unlikely, Gold moved back into its bullish stance; and should the Fed transmit a dovish approach moving-forward, Gold prices will likely remain firmly bid.

Created with Marketscope/Trading Station II; prepared by James Stanley

The Yen

This is a dangerous market at the moment, at least if recent history has been any guide. The past couple of Bank of Japan meetings haven’t been too fruitful for the Japanese economy. We looked at the prospect of the Yen being the global safe-haven vehicle of choice in September of last year, and over 1,000 pips later that theme continues to ring true. Frankly, the Bank of Japan is in one of the least flexible spots of Global Central Banks after three years of extended QE have been unable to re-fire growth in the economy.

This led to massive Yen strength as risk aversion was running high early in the year, and the Bank of Japan attempted to offset that strength by making the surprise move to negative rates in January. This brought pretty disastrous consequences with the exact opposite response of what the BoJ was likely looking for. Rather than seeing Yen weakness and strength in Japanese stocks, the Yen continued to strengthen while the Nikkei continued to dive-lower.

After April’s BoJ announcement brought no new information to markets, the Yen rallied again, with USD/JPY running into a strong zone of long-term support. Traders looking to sell the pair should be careful while we operate so near this zone.