The Swing Overview – Week 40
Equity indices weakened sharply last week as risk sentiment deteriorated amid growing concerns that higher inflation may persist even after global growth has peaked. The US dollar has continued to strengthen in this environment.
Meanwhile the gold has also continued to weaken, mainly as a result of rising US Treasury rates. On Thursday, however, there was a strong rise in gold. Is this a sign of a turnaround in this precious metal which is sometimes considered a hedge against higher inflation?
Data from the US economy
Positive news came from the housing market, where the pending home sales indicator for August was up 8.1% (down 1.8% in July).
In contrast, consumer confidence in September, which indicates the economy's consumer sentiment, was worse than in the previous month. The index came in at 109.3, compared to 115.2 the previous month.
US labor market data on Thursday then showed an unexpected rise in jobless claims for the third week in a row. From this point of view, we cannot talk about the recovery of the labour market in the US yet.
Fed chief Jerome Powell said on Wednesday that addressing the "tension" between high inflation and high unemployment is the Fed's most pressing concern. In doing so, he acknowledged the potential conflict between the US central bank's two goals of ensuring stable prices and full employment.
In this context, some investors are concerned about "stagflation". This is a condition where high inflation is followed by high unemployment and the economic output stagnates at the same time.
The SP 500 has broken through significant support
The sell-off continues on the SP 500 index. The SMA 100 average line has been broken on the daily chart. The break of this strong support is a strong bearish signal. Furthermore, the price has broken the horizontal support at 4,300 and is moving further down.
Figure 1: The US SP 500 index on a daily and 4H chart
The next support is then in the zone around the price of 4,237. The current nearest resistance is around 4,300.
A bearish formation called the death cross has formed on the DAX.
When the moving average with a period of 50 falls below the moving average with a period of 100 on the daily chart, a death cross pattern is formed. This is mostly a bearish signal and the direction of the indices has been confirming it so far. The EMA 50 moving average is below the SMA 100 on the H4 and also on the D1 chart.
Figure 2: The DAX on a daily and 4H chart
The price has currently reached the support, which is at the price in the band around 15,050. Once it is broken, we can expect a move to the price around 14,900 where the next support zone begins.
The euro continues to fall against the dollar
The euro continues to move in a downtrend on the pair with the US dollar, which we can see on the 4H timeframe and also on the daily chart. Currently, nothing seems to be able to stop this downward movement in an environment of risk-off sentiment. Price has broken through significant support at around 1.16 and is continuing further south.
Figure 3: EURUSD on H4 and daily chart
The next support can be seen in the band around 1.15.
The rise in US bond yields has stalled, the gold has strengthened
The yield on the US 10-year Treasury bond strengthened to 1.564% last week. But on Thursday, yields started to fall and gold reacted with a sharp rise, reaching a price of USD 1,764 per ounce. But it is also the price at which the first resistance is found.
Figure 4: The gold on the H4 chart and the 10-year US government bond yield on the H4 chart
As the gold is in a downtrend so far, the gold price at resistance may look like an interesting opportunity to trade. Taking a short trade at the pice 1,757 with a stop loss around 1,766 and a target price of 1,723 would provide a favorable Risk Reward Ratio 1:4.