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Technical Tuesday: Gold, EUR/USD and S&P 500

Welcome to Technical Tuesday, a weekly report where we highlight some of the most interesting markets that will hopefully appease technical analysts and traders alike.

In this week’s edition, we are getting technical on the 10-year US bond yields, gold, EUR/USD and S&P 500. So, there’s something for everyone.

  • Yields drop, but will they rise back?
  • Gold attempting breakout
  • EUR/USD rises further inside bear channel
  • Stocks continue short-covering bounce

Yields drop, but will they rise back?

One of the main drivers behind the financial markets thought this year have been rising yields as a result of heightened fears about rate hikes amid soaring inflation. In recent days, yields have dropped as softer-than-expected US economic data has raised speculation that there might be a change in central bank policy. Consequently, we have seen stocks rise along with metals and foreign currencies, with the dollar going in the opposite direction. The key question for investors in any of these markets is whether the moves will last. After all, it is not the first time we have seen such a squeeze this year, only for the selling pressure to then resume and more profoundly than the rally. Fundamentally, not a lot has changed but there’s quite a bit of ‘hopium’ in these markets.

So, it is only fair we start this Technical Tuesday article with a look at the benchmark US 10-year bond yield:

As per the chart, the 10-year yield has now arrived at a key support zone around 3.50% to 3.63%, which was previously resistance. As is often the case in rising trends, old resistances often turn into support, leading to renewed strength. Are we going to see something similar in bond yields, again? If so, then watch out for another sell-off in stocks and gold. Speaking of the shiny metal…

Gold attempting breakout

The precious metal has risen sharply along with everything else as mentioned above. It is now attempting to stage a breakout from the bearish channel it has been stuck inside for several months. Last time it attempted a breakout, on August 10, it failed miserably. Will it be Déjà vu for gold investors again? Or will be a different story, especially as central banks across the world have added to their net gold holdings for the fifth consecutive month in August, according to the World Gold Council?

As much as I think gold is heading higher in the long-term, rising interest rates is what has been continually caused gold to sell-off. Given that not a lot has changed on the rates front, I am more inclined towards another failed breakout attempt than a genuine one.

But let’s wait for the market to decide, as it could be that the market has now fully priced in the near-future rate hikes. It is always good to be prepared for any outcome. Indeed, if gold goes on to break above its recent high at $1735, then that would be the confirmation many would-be buyers might be waiting for.

On the other hand, a move back below Monday’s high at around $1700 could see the bulls start to abandon the long positions they have accumulated in the last week to so. And a potential move back below $1675/6 area, which was last year’s low and pivotal level, would be the confirmation the bears would need.

EUR/USD rises further inside bear channel

The FX markets have followed the events in bond and equity markets by pushing foreign currencies higher in favour of the US dollar. Anyone calling the top on the dollar will be very brave, because the Fed is not done with aggressive rate hikes yet.

Like gold, the EUR/USD has been stuck inside a long-term bearish channel. It is now testing a very important resistance area between around 0.9945 to 1.0000, which was previously support. A clean breakout above parity will be bullish. But there’s no major fundamental justification for that yet, I don’t think.

Support is seen around 0.9850, the base of today’s breakout. A daily close below this level will be rather bearish.

Stocks continue short-covering bounce

As mentioned earlier, buoyed by hopes that softening US economic data is going to lead to a change in central bank policy, stocks have risen along with metals and bonds, with the dollar going in the opposite direction. The key question for investors in any of these markets is whether the moves will last. After all, it is not the first time we have seen such a squeeze this year, only for the selling pressure to then resume and more profoundly than the rally. Fundamentally, not a lot has changed but there’s quite a bit of ‘hopium’ in these markets.

With the markets having been nearly one-sided – namely long dollar, short everything else – the liquidation of those positions is undoubtedly a big reason why the markets have squeezed in the other direction so viciously. As the indices like the S&P 500 rise, it is essential that the bears must wait for the right moment – and signal – before stepping in on the short-side again.

In the last day and a half, it has been a one-way trade higher, giving the bulls hope. But more evidence of a bottom is needed to be seen before I drop my bearish technical outlook on the stock markets.

Forex.com
Forex.com
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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