Price Action Talking Points:
- It’s been a pensive Q2 and the end of the quarter is now in view for next week.
- Stocks pulled back from the bearish theme this morning and with the end of quarter in view, the big question is for how long pullbacks may run. There’s no evidence that the pain trade is yet over.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
In this webinar I covered a variety of topics. But, the central premise was that trends don’t move in straight lines.
Especially after a large move, and in particular ahead of quarter-ends, such as we have now. The end of what’s become an eventful Q2 is just around-the-corner for next week and after the fireworks of last week, many trends were stretched. This doesn’t necessarily denote reversal, but it can spell for pullbacks and this can be relevant in a variety of markets as I covered today.
US Dollar
The US Dollar set a fresh 20-year high right at the release of the FOMC statement last week. Since then prices have pulled back and there may be more of that in store. This wouldn’t necessarily have anything to do with the US or the FOMC, but perhaps more pertinent to the Euro and the ECB. Going into that FOMC rate decision expectations around the ECB were extremely low. Just the week before, the bank offered up a possible 25 basis point hike in July to counter the 8% inflation that’s being seen in the Euro-zone.
That likely won’t do the job and, at this point, it really seems like the ECB has fallen in the same trap that the Fed was in last year – looking to avoid tighter policy for fear of choking off what growth is there, all the while allowing inflation to continue to grow. This could spell an ECB that has to play catch up at some point. When that point might be, I have no idea, but with how low expectations are right now given the context, it would seem a smart play to look for convergence of rate expectations as opposed to even greater divergence.
If we add in all of those recent calls for parity in EUR/USD, this could produce a pretty attractive contrarian type of scenario.
In EUR/USD, this opens up the possibility for a resistance test. Prices are heading for a big zone that runs from 1.0593-1.0638. Above that, another swing is at 1.0695 after which another batch of resistance opens up at 1.0767-1.0787.
EUR/USD Four-Hour Price Chart
Chart prepared by James Stanley; EURUSD on Tradingview
In the US Dollar, that pullback could equate to a run down for a test of 103. There’s another spot of support below that, around 102.36 after which the ‘big zone’ that came into play in late May around the 101.80 Fibonacci level.
If price breaches the May low, a bigger theme is at play. But, for now, the bullish trend is alive and there’s no reason to think that it’s nearing death yet.
US Dollar Daily Price Chart
Chart prepared by James Stanley; USD, DXY on Tradingview
Yen-Weakness Back Again
In my last webinar in early-June I had harped on this theme and I did so again in today’s session. When Yen-weakness themes are getting priced-in there’s some considerable movement to work with after last week’s Bank of Japan rate decision, the door was seemingly open for more. I had discussed as such last Friday morning and then again this morning after those trend put in more break. This morning marked a fresh 24-year high in USD/JPY as the pair breached the 135.00 psychological level.
But, as I shared in the webinar, there’s not much that can be done here. A trader could, possibly, get long on the basis of hope, hoping that the trend continues higher. But hope isn’t a trading strategy and given the new high water mark combined with the recent break, there’s not great indication of fade potential, either.
But – prior points of resistance become support potential and this plots at 135.60 and then the 135.00 level. Or – alternatively, traders can look to extrapolate on that theme elsewhere, such as against the Euro.
USD/JPY Four-Hour Price Chart
Chart prepared by James Stanley; USD/JPY on Tradingview
EUR/JPY
Last Friday, I had looked at a recently completed morning star formation in EUR/JPY after a strong reversal had showed in the middle of last week. That formation has since continued higher and, at this point, EUR/JPY is nearing a face off at resistance 144.25.
Given what I had shared above, where there’s some room to price in higher rates in the Euro-zone, this could make for a compelling setup on the bullish side of EUR/JPY, particularly as price makes a move on that high water-mark which could keep the door open for continued breakout.
EUR/JPY Daily Price Chart
Chart prepared by James Stanley; EUR/JPY on Tradingview
S&P 500
The S&P 500 is bouncing today and already I see many asking whether the low is in. I do not believe that to be the case. But, on tune with today’s topic, trends don’t move in a straight line, and last week saw some pretty heavy support play-in after the post-Fed sell-off.
At this point, the daily chart of the S&P 500 is showing a morning star formation which keeps the door open for higher prices, which would really just be clawing back more of last week’s losses. There’s a very clear area of resistance sitting overhead, the same that I had looked at ahead of last week’s sell-off but, at the time, it was support. This spans from 3802 up to 3830. And, above that is some gap from last week’s open that runs up from 3877-3900.
We’re at the end of the quarter so we may see some continued counter-trend movement, similar to what showed in the back-half of March. But the trend is still bearish here and given what the Fed has been saying, it doesn’t seem as though we’re near the lows yet.
S&P 500 Daily Chart
Chart prepared by James Stanley; S&P 500 on Tradingview
Nasdaq 100
The Nasdaq is similarly situated, finding a big spot of support last week while putting in a bounce to begin this week.
The support in the Nasdaq is a bit more clear-cut, however, as this showed right at the 50% mark of the 2018-2021 major move. That 2018 inflection, by the way, is from when the Fed capitulated on the last rising rate cycle back. The bank quickly moved into a cutting stance in 2019, which propelled stocks, and we’ve now retraced half of that since the Nasdaq topped-out in November.
The Nasdaq is already testing resistance, taken from a prior spot of support that set the lows in mid-May. There’s also some remaining gap, running up to around 11,888. And if we do see a strong end of quarter rally, there’s still reasonable resistance up to the 13,050 zone.
For downside price action, breakout potential remains on a push below last week’s low, aiming for the next major support zone on the chart running from 10,501-10,750.
Nasdaq 100 Weekly Price Chart
Chart prepared by James Stanley; Nasdaq 100 on Tradingview
--- Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
