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Gold had been in recovery mode after posting a false bearish breakout from its recent rangebound pattern. Even though the price sliced through the descending trendline that connects a series of lower highs since early June and the 50-day simple moving average (SMA), it retraced lower after failing to claim the upper end of the rectangle.

The short-term oscillators are endorsing this latest correction but there are still no signs of a sustained downtrend. Specifically, the MACD lost some ground but remains above its red signal line, while the RSI retreated within the positive territory.

If the slide continues and the price declines below the 50-day SMA, the lower end of the rangebound pattern at 1,925 might be the first barrier for the bears to clear. A drop below the sideways pattern could ignite more selling pressures that might bring the three-month low of 1,893 under scrutiny. Further declines may then cease at the March resistance of 1,857, which could serve as support in the future.

Alternatively, bullish actions could propel bullion towards the recent rejection region of 1,987. Should that barricade fail, attention could shift towards the crucial 2,000 psychological mark. Even higher, the April peak of 2,048 could cap any upside attempts.

In brief, gold has been experiencing a mild correction due to its failure to break above its recent rectangle pattern. However, the technical picture could remain neutral for as long as the price fluctuates within this range.

On the hourly chart of AUD/USD at FXOpen, the pair started a fresh decline from well above 0.6800. The Aussie Dollar traded below the 0.6790 support and moved into a short-term bearish zone.

The pair even settled below the 50-hour simple moving average and tested 0.6720. The pair is now consolidating losses and facing resistance near the 0.6740 level. The first major hurdle for the bulls could be near the 50-hour simple moving average or 0.6760.

If there is an upside break above the 0.6760 zone, the pair could rise steadily toward the 0.6790 level. Any more gains might send AUD/USD toward 0.6845.

Conversely, the pair could continue to move down below 0.6720. The first major support is near the 0.6700 level, below which the pair could dive toward 0.6660. Any more losses might send the pair toward the 0.6620 support.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Daily Pivots: (S1) 1.1107; (P) 1.1126; (R1) 1.1144; More...

Intraday bias in EUR/USD remains on the downside for the moment. Fall form 1.1274 short term top should continue lower. But outlook will remain bullish as long as 1.1011 resistance turned support holds. Above 1.1173 will resume larger up trend from 0.9534. However, firm break of 1.1011 will argue that larger correction is underway.

In the bigger picture, rise from 0.9534 is still expected to continue as long as 1.1011 resistance turned support holds. Decisive break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next. However, firm break of 1.1011 will bring deeper fall back to 1.0634 support next.

Daily Pivots: (S1) 1.2811; (P) 1.2858; (R1) 1.2899; More...

Intraday bias in GBP/USD remains mildly on the downside for the moment. Fall from 1.3141 short term top should extend to r 55 D EMA (now at 1.2692). On the upside, break of 1.2963 minor resistance will turn bias back to the upside retest 1.3141 high instead.

In the bigger picture, as long as 1.2678 resistance turned support holds, rise form 1.0351 (2022 low) is expected to continue. Next target is 100% projection of 1.0351 to 1.2445 from 1.1801 at 1.3895. However, sustained break of 1.2678 will argue that it's at least corrective this rally, with risk of bearish reversal.

Daily Pivots: (S1) 0.8640; (P) 0.8659; (R1) 0.8678; More...

Intraday bias in USD/CHF remains mildly on the upside at this point. Rebound from 0.8553 short term bottom would target 0.8818 support turned resistance. Rejection by 0.8818 will retain near term bearishness for another decline through 0.8553. Meanwhile for now, risk will stay mildly on the upside as long as 0.8553 holds, in case of retreat.

In the bigger picture, the break of 0.8756 (2021 low) indicates break out from the long term range pattern. For now, medium term outlook will stay bearish as long as 0.9146 resistance holds. Further fall would be seen to 61.8% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.8317 next.

Daily Pivots: (S1) 140.38; (P) 141.17 (R1) 142.59; More...

Intraday bias in USD/JPY remains on the upside at this point. Rebound from 137.22 would target retesting 145.06 first. Firm break there will target 61.8% projection of 129.62 to 127.22 from 145.06 at 146.76 next. On the downside, below 139.74 minor support will bring retest of 137.22 instead.

In the bigger picture, overall price actions from 151.93 (2022 high) are views as a corrective pattern. Current development suggests that the second leg (the rise from 127.20) might not be over yet. But even in case of extended rise, strong resistance should be seen from 151.93 to limit upside. Meanwhile, break of 137.22 support should confirm the start of the third leg to 127.20 (2023 low) and below.

Daily Pivots: (S1) 1.3176; (P) 1.3202; (R1) 1.3249; More....

USD/CAD is still bounded in range trading above 1.3091 and intraday bias stays neutral first. Further decline is expected as long as 1.3386 resistance holds. Break of 1.3091 will resume larger fall and target 61.8% projection of 1.3653 to 1.3115 from 1.3386 at 1.3054. However, firm break of 1.3386 will indicate near term reversal and turn outlook bullish.

In the bigger picture, price actions from 1.3976 are viewed as a correction to up trend from 1.2005 (2021 low) only. But even so, deeper decline is expected as long as 1.3386 resistance holds. Further fall could be seen to 61.8% retracement of 1.2005 to 1.3976 at 1.2758. Meanwhile, break of 1.3386 will be a sign that the correction has completed and bring stronger rally back to retest 1.3976.

Markets

Markets on Friday mostly showed no big swings with investors mainly looking forward to this week’s eco data and central bank decisions. There were no data with market moving potential in the US or EMU. In Japan, CPI (ex fresh food 3.3% Y/Y, ex fresh food and energy 4.2%) was close to expectations. A few hours after the release, headlines from sources reported to have knowledge of the matter appeared on financial news wires indicating that the BOJ was likely to keep its policy of YCC unchanged at this week’s meeting. The comments pushed the yen substantially lower. USD/JPY closed at 141.73 (was 140.30 area before the headlines). UK June retail sales (0.7% M/M) were slightly stronger than expected, but the impact on gilts (changes between -3.9 bps 2-y and +1.7 bps 30-y) and sterling (close EUR/GBP 0.8656) were limited. In the end US yields declined up to 1.5 bps (10-y). German yields eased between 1.6 bps (30-y) and 3.0 bps (2-y). After Thursday’s USD rebound, the dollar remained well bid. DXY gained from the 100.80 area to close at 101.07. The decline in EUR/USD slowed (close 1.1124). US equities didn’t go anywhere (S&P +0.03%). The EuroStroxx 50 succeeded a modest 0.4% gain.

Asian markets this morning show a mixed picture with Japan outperforming and China underperforming. With respect to the latter, investors are still pondering the effect from expected additional and monetary stimulus. The yuan today again weakens (USD/CNY 7.194). Treasuries are trading little changed and so does the dollar. Today, investors will keep a close eye at the PMI confidence indicators. Both the US and EMU composite measure are expected to ease slightly further respectively from 53.2 to 53.0 and from 49.9 to 49.6. We don’t have much reason to take a different view from the consensus for the US. After last month’s rather steep setback in Europe, we assume that enough bad news might be discounted for now. Whatever the outcome, probably a big surprise is needed for markets to place strong directional bets on Fed and ECB policy beyond this week’s decision. In both cases a 25 bps rate hike is a ‘fait accompli’. Most important task for Chair Powell and Lagarde to provide investors with some ‘conditional guidance’ on what is most likely to happen in September. We assume both to firmly keep the option for further tightening open. In such a scenario, especially the downside in short-term yields should be well protected. The dollar rebounded last week, but the technical picture didn’t change in a profound way. EUR/USD holds above the 1.1095 previous top. Short-term, USD gains might become more difficult from here.

News and views

Spanish snap elections yesterday were inconclusive. The early ballot was called by incumbent prime minister Sanchez after his PSOE socialist party suffered heavy losses in May’s local elections. PSOE gained 122 seats in the 350-seat chamber. With support from potential leftwing partners, Sanchez could secure 172 seats, still less than the 176 needed for a majority. The Partido Popular in pre-election polls was projected to become the clear victor but in the end only won 136 seats. With the support of the 33-seat big Vox, a rightwing alliance would deliver 169 of the spots. Technically, Sanchez could remain in power if other smaller parties, including Junts per Catalunya, would abstain in a vote of confidence. But this will probably come with important concessions to the separatist party. An election re-do is therefore the most likely outcome.

Japan’s service economy remains on a solid growth track, PMI’s showed this morning. The services series stabilized at 53.9 in July, from 54 in June. Details including new (export) orders and backlogs still showed growth, though weaker than in June, meaning activity was often fueled by the completion of existing orders. Employment fell from growth in a decline. Firms also signaled the softest degree of positive sentiment regarding the year-ahead outlook for activity since the start of the year. Manufacturing printed slightly deeper in contraction territory, from 49.8 to 49.4. New orders showed a steeper decline, employment weaker growth. The future, year-ahead output outlook was assessed less rosy than in June. Input price pressures in manufacturing eased, suggesting slowing cost inflation, but accelerated in the services sector. In both, however, output price pressures to the end consumer picked up. This may raise pressure on the BoJ to act, even though officials end last week suggested a change to policy at the July meeting this week isn’t likely. The Japanese yen barely reacted to the data with USD/JPY hovering around Friday’s closing levels of 141.53.

Last week ended on a caution note after the first earnings from Big Tech companies were not bad, but not good enough to further boost an already impressive rally so far this year. The S&P500 closed the week just 0.7% higher, Nasdaq slipped 0.6%, while Dow Jones recorded its 10th straight week of gains, the longest in six years, hinting that the tech rally could be rotating toward other and more cyclical parts of the economy as well.

This week, the earnings season continues in full swing. 150 S&P500 companies are due to announce their second quarter earnings throughout this week. Among them we have Microsoft, which is pretty much the main responsible of this year’s tech rally thanks to its ChatGPT, Meta, Alphabet, Visa, GM, Ford, Intel, Coca-Cola and some energy giants including Exxon Mobil and Chevron.

On the economic calendar, we have a busy agenda this week as well. Today, we will be watching a series of flash PMI figures to get a sense of how economies around the world felt so far in July, then important central bank meetings will hit the fan from tomorrow. The early data shows that both manufacturing and services in Australia remained in the contraction zone, as Japan’s manufacturing PMI dropped to a 4-month low in July. German figures could also disappoint those watching the EZ numbers.

On the central banks front, the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ) will meet this week, and the first two are expected to announce 25bp hike each to further tighten monetary conditions on both sides of the Atlantic.

Zooming into the Fed, activity on Fed funds futures gives almost 100% chance for this week’s 25bp hike. But many think that this week’s rate hike could be the last of this tightening cycle, as inflation is cooling. But the resilience of the US labour market, and household consumption will likely keep the Fed cautiously hawkish, and not announce the end of the tightening cycle this Wednesday. There is, on the contrary, a greater chance that we will hear Fed Chair Jerome Powell rectify the market expectations and talk about another rate hike in September or in November. Therefore, the risks tied to this week’s FOMC meeting are tilted to the hawkish side, and we have more chance of hearing a hawkish surprise rather than a dovish one. Regarding the market reaction, as this week’s Fed meetings falls in the middle of a jungle of earnings, stock investors will have a lot to price on their plate, so a hawkish statement from the Fed may not directly impact stock prices if earnings are good enough. Bond markets, however, will clearly be more vulnerable to another delay of the end of the tightening cycle. The US 2-year yield consolidates near the 4.85% level this morning, and risks are tilted to the upside. For the dollar, there is room for further recovery as the bearish dollar bets stand at the highest levels on record and a sufficiently hawkish Fed announcement could lead to correction and repositioning.

Elsewhere, another 25bp hike from the ECB is also seen as a done deal by most investors. What investors want to know is what will happen beyond this week’s meeting. So far, at least 2 more 25bp hikes were seen as almost certain by investors. Then last week, some ECB officials cast doubt on that expectation. Now, a September rate hike in the EZ is all but certain. The EURUSD remains under selling pressure near the 1.1120 this morning, the inconclusive Spanish election is adding an extra pressure to the downside.

Finally, the BoJ is expected to do nothing, again, this week. Japanese policymakers will likely keep the policy rate steady in the negative territory and the YCC policy unchanged. The recent U-turn in BoJ expectations, and the broad-based rebound in the US dollar pushed the USDJPY above the 140 again last Friday, and there is nothing to prevent the pair from re-testing the 145 resistance if the Fed is sufficiently hawkish and the BoJ is sufficiently dovish.

• Prior underperforming US banks rallied last week where the SPDR Banks ETF rose by 6.76%, its best weekly gain seen in 14 months.
• The high growth technology concentrated Nasdaq 100, the top year-to-date performer, underperformed last week, dragged down by Tesla and Netflix ex-post earnings releases.
• Extreme positioning, and complacency bias in Nasdaq 100 increase the risk of a medium-term bearish reversal in technology stocks.

In the past two weeks, we have seen the latest Q2 earnings releases of the major US banks; JP Morgan, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley, and one of the high-flying technology-related “Magnificent Seven”, Tesla as well as a Netflix. All the major banks beat earnings expectations except Goldman Sachs, but its disappointing earnings had been well-telegraphed by senior management in public speeches ahead of its result release.

Both Tesla and Netflix have managed to beat their bottom lines too. Interestingly, their respective share price performances ex-post earnings releases move in opposite directions as compared with the US banks. Based on last week’s performance for the week ended 21 July, all the major US banks recorded positive returns; JP Morgan (+3.46%), Bank of America (+9.86%), Wells Fargo (+5.51%), Citigroup (+2.84%), Goldman Sachs (+7.90%), Morgan Stanley (+9.59%) which in turn managed to have a positive spill-over effect to the broader US banking sector where the SPDR S&P Bank exchange-traded fund (ETF) recorded a weekly gain of +6.76% over the same period, its best return since the week of 23 May 2022.

In contrast, Tesla, and Netflix posted dismal weekly returns of -7.59% and -3.26% respectively as of the end of last Friday, 21 July which in turn triggered a negative feedback loop into the high growth, and technology-related broader stock indices; Nasdaq 100 (-0.90%) and iShares Semiconductor ETF (-1.44%).

Sentiment & positioning were significant contributors to Nasdaq 100 & US technology stocks’ underperformance

The main catalysts that contributed to the last week’s negative returns and underperformance of Nasdaq 100 and iShares Semiconductor ETF have been FOMO (“fear of missing out”), complacency, and extreme positioning based on a relative basis.

The Nasdaq 100 is the top-performing major stock index so far globally with a year-to-date gain of +41% as of 21 July versus a loss of -10.8% seen in the SPDR Banking ETF over the same period. Thus, technology-related equities and the Nasdaq 100 have attracted momentum chasers, especially for fund managers or market participants who missed the earlier run-up since March 2023 and the need to beat benchmark stock indices.

In addition, technology equities recorded an eight-week cumulative inflow of around US$15 billion that surpassed their cumulative peaks inflows of 2022 according to a recent BofA Global Investment Strategy research report.

Also, based on recency bias behavioral traits that extrapolate current year-to-date outperformance of Nasdaq 100 into the future, for the months ahead and even next year may have led to a higher level of complacency and extreme level of relative positioning.

US Technology stocks are at risk of further medium-term downside pressure & underperformance

Fig 1:  Relative performance of Nasdaq 100 & iShares Semiconductors over SPDR Banking, put/call ratio of Nasdaq 100 as of 21 Jul 2023 (Source: TradingView, click to enlarge chart)

The chart above plots the relative performance (ratio) of Nasdaq 100 ETF (QQQ) over SPDR Banking ETF (KBE), and iShares Semiconductor ETF (SOXX) over SPDR Banking ETF (KBE). Both the ratios QQQ over KBE and SOXX over KBE have reached fresh all-time levels in June 2023 and May 2023 respectively. In addition, these two ratios have hit more than two standard deviations above their respective 20-week moving averages which suggest relatively overstretched bullish positioning in the Nasdaq 100 and semiconductor stocks.

The current reading seen in the options market indicates the bullish momentum of Nasdaq 100 is likely to persist as indicated by the put-call ratio of Nasdaq 100 ETF (QQQ) which measures the number of traded put options divided by call options on the long side. A falling ratio indicates more calls are being bought versus puts which suggests market participants are not afraid of a falling market and have a bullish bias that prices may continue to rise, and if a negative event arises, it can easily reverse prices to the downside due to complacency of market participants. Vice versa for a rising put-call ratio.

Since 15 May 2023, the put-call ratio of Nasdaq 100 ETF (QQQ) has continued to decline and as of 17 July, it stood at 1.19 which is a nine-week low. Therefore, it will be a pivotal week ahead for Nasdaq 100 and the “Magnificent Seven” as market participants await the earnings results and guidance of Microsoft, Alphabet, Texas Instruments (out on Tuesday, 25 July), and Meta Platforms (out on Wednesday, 26 July).