Page | 1 | PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 017/10/2019 Ref. No.: TA2021_0164 Technical analysis: US market outlook Hawks beat the doves; the Fed’s contradicting stance US MARKETS| MARKET OUTLOOK | TECHNICAL ANALYSIS UPDATE • The Fed left its monetary policy unchanged but a subtle change in its language suggests tapering may come sooner rather than later. Maybe end-2021 or early 2022. • Jerome Powell made it clear he believes inflation since May is transitory. • But where the Fed previously hinted at tapering ONLY when full employment was reached, it now acknowledges the economy is inching towards normalisation. • Technical indices are trending within range after the S&P 500 and Nasdaq scaled new highs while the Dow and Russell struggled to break new records. 02 August 2021 Tradable instruments: Wall Street index USD1CFD US SP 500 Index USD5 CFD US Tech 100 Index USD 5 CFD SPDR Dow Jones Industrial Average ETF ProShares Ultra Dow30 SPDR S&P 500 ETF Invesco QQQ Trust Chua Wei Ren Technical Analyst [email protected]Figure 1a: Fed’s balance sheet and Fed funds rate target are unchanged Source: Bloomberg, PSR The above chart indicates that assets on the Fed’s balance sheet remain high. At a glance, the divergence between the Fed funds rate and asset purchases suggests low interest rates may linger on for a while. We think tapering is unlikely this quarter as employment is still short of the 6mn jobs to be filled, compared to the strong employment before the pandemic. Add to that the threat posed by the Delta variant and the Fed is likely to wait and see.
Technical analysis: US market outlook Hawks beat the doves; the Fed’s contradicting stance US MARKETS| MARKET OUTLOOK | TECHNICAL ANALYSIS UPDATE
• The Fed left its monetary policy unchanged but a subtle change in its language suggests tapering may come sooner rather than later. Maybe end-2021 or early 2022.
• Jerome Powell made it clear he believes inflation since May is transitory.
• But where the Fed previously hinted at tapering ONLY when full employment was reached, it now acknowledges the economy is inching towards normalisation.
• Technical indices are trending within range after the S&P 500 and Nasdaq scaled new highs while the Dow and Russell struggled to break new records.
02 August 2021
Tradable instruments: Wall Street index USD1CFD US SP 500 Index USD5 CFD US Tech 100 Index USD 5 CFD SPDR Dow Jones Industrial Average ETF ProShares Ultra Dow30 SPDR S&P 500 ETF Invesco QQQ Trust Chua Wei Ren Technical Analyst [email protected]
Figure 1a: Fed’s balance sheet and Fed funds rate target are unchanged
Source: Bloomberg, PSR The above chart indicates that assets on the Fed’s balance sheet remain high. At a glance, the divergence between the Fed funds rate and asset purchases suggests low interest rates may linger on for a while. We think tapering is unlikely this quarter as employment is still short of the 6mn jobs to be filled, compared to the strong employment before the pandemic. Add to that the threat posed by the Delta variant and the Fed is likely to wait and see.
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US Markets TECHNICAL ANALYSIS
Figure 1b: St Louis Fed’s 5-year forward inflation expectations vs. Fed funds effective spot rates
Source: Bloomberg, PSR Five-year forward inflation forecasts appear to have priced out rate hikes in the near future while the Fed funds rate target remains low. If the Fed cuts rates now, this will only severely limit room for it to cut rates further. But the Fed itself is painting a confusing picture. First, it says it is in no rush to taper off. Yet, it is reducing purchases of mortgage-backed securities and Treasuries. To a lesser extent, its reverse repurchases are also soaking up liquidity from the open market. This has not tamed inflation but only adds to the confusion. Figure 1c: PCE core and headline inflation well above the Fed’s 2% target, though lower than market estimates
Source: Bloomberg, PSR PCE core inflation of 3.54% is above the Fed’s 2% target. Inflation is high due to costlier energy and food and soaring housing rents. The good news is that core PCE 0.46%. Which should provide some relief to markets. Inflation will continue to dominate 3Q21 narratives, though we believe the pressure will ease as consumer sentiment dipped for the second consecutive quarter in 2Q21 (Fig 1d).
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US Markets TECHNICAL ANALYSIS
Figure 1d: Consumer sentiment dipped as inflation fears mounted
Source: Bloomberg, PSR
Technical analysis Figure 2a: Primary wave count after expanded wedge breakout indicates further upside
Source: Bloomberg, PSR The Dow’s Elliot wave count has completed waves (1) and (2) of its intermediate phase. With its ongoing wave (3) incomplete based on the Fibonacci expansion of waves (1)-(2), the target may well head beyond 40,000 once 36,373 is broken. Bullish flags in weekly charts indicate further upside. Moreover, prices have been supported in the resistance zone of 32,381-34,046. The concern is that prices may stagnate, especially as a hanging man appeared two weeks ago with no candle appearing to break the resistance top at 35,000. As such, there may be a slight correction to the 32,281 level, before a rebound to immediate targets of 36,737.75 or 37,920.
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US Markets TECHNICAL ANALYSIS
Figure 2b: Daily wave count indicates final upside to wave (v) should it break 35,000
Source: Bloomberg, PSR Following a rebound of wave (iv) of the intermediate phase from the 33,300 region on 21 June, the final phase of the sub-wave (v) is likely to complete further. As explained earlier, the ongoing bullish flag is key to potential upside. Zooming into even smaller sub-waves flags a slight correction on Wednesday to the 33,227.78 level, before a potential rebound to around 37,920 to complete sub-wave (v). Figure 2c: Dow’s daily price actions - Resistance zone tested multiple times, weakening it in the process
Source: Bloomberg, PSR Another perspective is the Dow’s weakening momentum in the last two weeks, after multiple attempts to close above 35,000 flopped. This was especially the case last week when prices consolidated at 34,800-35,000. As multiple testing indicates that the resistance zone at 34,729-35,000 is weakening, we expect a breakout anytime now. This could take the form of a straight gap up on Monday or shortfall retracement rebound at the mean reversion support of 34,459-34,230 or 33,264-33,612 major support zone.
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US Markets TECHNICAL ANALYSIS
Figure 3a: S&P 500 has almost similar wave structure
Source: Bloomberg, PSR The S&P 500’s potential upside is enhanced by its ongoing wave (3) of the intermediate phase. This has yet to be completed as the sub-wave (v) is far from completion. Furthermore, the larger primary wave count ((3)) is likely to be extended with two sets of intermediate wave counts. The index’s surprise downside correction three weeks ago was supported at 4,259, thereby keeping its sub-wave count safe. Based on recent price actions, we expect prices to break 4,500 in the near term. Figure 3b: S&P 500’s resistance weakens, higher upside expected
Source: Bloomberg, PSR The S&P 500’s Ichimoku Kinko Hyo indicates a bullish uptrend, especially after a renewed bullish tankan-sen and Kijun-Sen crossover.
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US Markets TECHNICAL ANALYSIS
Figure 3c: S&P 500’s price actions
Source: Bloomberg, PSR S&P 500 price actions suggest that upside will need further testing, such as a breakout above its immediate target resistance zone to complete its 3a sub-Elliott wave count. Judging from its momentum last week, its consolidation phase at the upper bound of the resistance will likely be broken. Figure 4: Nasdaq 100 currently in running flat formation
Source: Bloomberg, PSR The Nasdaq 100’s only threat is the bearish divergence and weak break to the upside of its resistance zone, after a bearish engulfing candle last Tuesday led to a throwback retracement to its resistance zone. As such, we are anticipating a supported rebound at 14,272.21 to complete the last leg of its sub-wave (v) move-up.
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US Markets TECHNICAL ANALYSIS
Figure 5: Russell 2000
Source: Bloomberg, PSR The Russell 2000 has been see-sawing in the range of 2,360-2,085. Although the index rebounded for the fourth time in its support zone two Mondays ago, its rebound was rather weak (refer to the bearish flag formation highlighted in red parallel lines). Prices remain under their 63-period moving average. As such, our view remains that a larger rebound will happen in support zone 2, at 1,915-1,990.
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US Markets TECHNICAL ANALYSIS
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