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FOMC triggers market movement

Last weekThe complacency that had plagued the markets for the last few weeks came to an abrupt end following the FOMC update. We’d had weeks of very few trend line breakout moves but there was an abundance in this last week. The Federal Reserve indicated that US interest rates might rise sooner than initially forecast and this triggered a sharp pullback with stocks, a rise for the US dollar and risk aversion moves across the broader market. All four of the US stock index majors, S&P500, DJIA, NASDAQ and Russell-2000, closed lower as did Gold and a lot of commodity currencies as well as the risk-sensitive instruments of Copper and Emerging markets. Two of the cleanest trend line breakout moves from last week were on Gold and the GBP/JPY and these are highlighted below. No one can know with any certainty whether this risk-off shift is a temporary, knee-jerk reaction or the start of a new and longer-term trend. That being said, though, given that US stocks have gone up for the last 16 months some pause or pullback would not be out of order; trends do not travel in straight lines unabated. Added to this, whilst volatility was higher last week, momentum still remains low on a number of weekly stock index charts so try to keep an open mind. The mantra remains the same no matter your time frame: watch for any momentum-based trend line breakouts and exercise appropriate risk management.

 

Technical Analysis: It is important to keep in mind that this analysis is Technical and chart-based but that any major Fundamental news items, as recently seen with Covid-19, have the potential to quickly undermine identified chart patterns. This is why it is critical that traders appropriately manage their trade exposure and risk per trade during these volatile market conditions.

 

Trend line breakouts: There were a large number of TL b/o trades but most were aligned and due to US$ strength. Updates posted throughout last week can be found through the links here, here, here and here:

 

 

  • One of the best TL b/o trades came from the GBP/JPY: this gave a great TL b/o for around 260 pips and could have been caught by short-term traders off the 15 min chart for a great Risk: Reward set up!

 

GBP/JPY: 4hr: chart from Thursday's update with trend lines to monitor:

 

GBP/JPY: 4hr: the end of week chart after a great TL b/o for around 260 pips:

 

GBP/JPY: 15 min: note the great 6 R potential trade that was available following the trend line breakout during the European session:

 

  • Gold: a TL b/o trade for $100:

 

 

  • EUR/USD: a TL b/o trade for 220 pips.
  • AUD/USD: a TL b/o trade for 170 pips.
  • AUD/JPY: a TL b/o trade for 200 pips:

 

  • NZD/USD: a TL b/o trade for 180 pips.
  • GBP/USD: a TL b/o trade for 250 pips:

 

  • ASX-200: a TL b/o for 50 points.

 

 

This Week: (click on images to enlarge):

 

    • DXY: US$ Index: The US$ index closed with a large, bullish weekly candle and broke up through two bear trend lines. Traders should watch for any bullish follow-through up towards the 61.8% Fibonacci retracement, near 98 S/R. There is some caution needed with getting too excited here just yet though as, even though bullish +DMI momentum is edging higher above 20, the ADX is trending down. Resistance lies ahead from the weekly Cloud so watch this region for any new make or break. A more detailed analysis of the DXY can be found here.

 

DXY weekly: watch for any push to the 61.8% Fibonacci, circa 98:

 

 

    • Central Bank Update: there is one Central Bank Rate update this week: BoE (GBP).

 

    • USD/CAD: I have been monitoring this descending wedge for some months but it finally looks like there has been a decisive breakout. I find the Fibonacci retracement  to be a helpful tool to identify targets for breakout moves and, for the swing low move on the USD/CAD, this would bring 1.36 into focus.

 

USD/CAD weekly: watch for any push to 1.36:

 

 

 

    • % Stocks above their 200 Day Moving Average Index: The Percentage of stocks above their 200 Day Moving Average is still below the 85% region. The first chart below gives a perspective of this current level and shows the previous peaks near 92.50% and how there often tends to be some mean-reversion once such lofty levels are reached. The second, expanded, chart shows the continued struggle under the 92.50% level.

 

% of US Stocks above the 200 Day Moving Average: watch for any further reaction at the 92.50% region:

 

% of US Stocks above the 200 Day Moving Average (expanded): holding below 92.50%:

 

 

    • S&P500: Keep the bigger picture in perspective with the recent moves as this chart suggests there is a lot more room to move with the overall bullish run. However, this does not discount the odd pullback along the way as trends do not travel in straight lines forever; they tend to zig and zag their way along either bullish or bearish paths. Note how the recent Covid dip does not even figure on this chart!

 

S&P500 yearly: keep this latest move in perspective:

 

 

    • Market Phases: It is important to recall the three main types of market phases: AccumulationParticipation (Up and Down) and Distribution. Traders should monitor the chart of the S&P500 chart for any Distribution type activity that might eventually lead to Participation Down; especially as the S&P500 trades up near an all-time High. The chart below shows how the S&P500 evolved in the years leading up to, and during, the Global Financial Crisis (GFC). Note how the Distribution phase evolved over a period of many months and there was a double test of the all-time High region. Keep this in mind with the current market action on the S&P500.

 

S&P500 market phases: Global Financial Crisis 2007-2009:

 

S&P500: keep watch for any Distribution type of activity:

 

 

    • Copper: Copper is often viewed as one metric of economic health and closed with a large, bearish weekly candle and below the all-time High region of circa 4.65. Watch for any pullback to the 61.8% Fibonacci region, near 3 S/R.

 

Copper weekly: Watch for any pullback to the 61.8% Fibonacci region, near 3 S/R.

 

 

 

    • Emerging Markets: The Emerging market ETF, EEM, closed with a bearish weekly candle but ADX momentum remains low.

 

EEM weekly: watch for any Flag breakout:

 

 

    • DJIA: The DJIA closed with a large, bearish weekly candle and has finally broken below a 16-month support trend line. Traders should watch for any potential Bull Flag but, if bearish momentum accelerates, watch for any pullback to the weekly 61.8% Fibonacci, near 2,500.

 

DJIA weekly: watch for any potential Bull Flag:

 

 

    • NASDAQ composite: The NASDAQ Composite Index closed with a bearish-coloured Spinning Top weekly candle, reflecting indecision, as it continues to chop sideways after breaking below a 16-month support trend line. There still isn't a lot of supporting bullish momentum on the weekly chart just yet and this sideways action continues shaping up in a potential Bull Flag style pattern.  Watch for any new momentum breakout.

 

NASDAQ weekly: watch for any new Flag breakout:

 

 

    • DAX weekly: The DAX closed with a bearish-coloured Spinning Top weekly candle, reflecting indecision, but only after printing a new all-time daily High.

 

DAX weekly: the trend remains 'up':

 

 

    • Russell-2000: The Russell-2000 is often viewed as the 'Canary in the Coal Mine' for US stocks and the index closed with a bearish, almost 'engulfing' weekly candle but remains above a 16-month support trend line for the time being. Caution is needed here though as the ADX remains below 20 and is trending lower.

 

RUT weekly:  watch the 16-month support trend line:

 

 

    • 10-yr T-Note Interest rate / TNX: This has closed with a bearish weekly candle and remains below the Resistance turned Support region of 15. 

 

  • 10-yr T-Note Interest rate: watch 15 for any new make or break: 

 

 

    • Bonds / TLT: The Bond ETF, TLT, closed with another large, bullish weekly candle.

 

TLT weekly: seems to be bouncing up from the 135 level and near the 61.8% Fibonacci:

 

 

    • BTC/USD: I continue to view this latest pullback as a well-due technical correction following the recent rally. I have previously mentioned that the 61.8% Fibonacci, near $30,000, is the line-in-the-sand level to monitor and this remains the case. IMHO: any hold above the 61.8% Fibonacci level would simply further legitimise BTC/USD and any of the other cryptos in the stable that might similarly hold above this support region.

 

BTC/USD: the whole-number $30,000 remains the level to watch:

 

 

    • VIX: the Fear index closed with a bullish weekly candle and back above the 20 level.

 

VIX weekly: watch for any push back to 30 S/R:

 

Calendar: Courtesy of Forex Factory:

 

 

Earnings: Courtesy of Earnings Whispers:

 

Market Analysis:

 

S&P500: Traders and investors reacted negatively to the Federal Reserve suggestion that US rates might lift sooner than previously advised and the S&P500 closed with a bearish, almost 'engulfing' weekly candle BUT only after having reached a new all-time High. A pause here would not be all that surprising though as the trend has been up for the last 16-months. This support trend line was broken last week BUT caution is required given that momentum is declining and contracting on the weekly chart. I have been warning that, with any break of this 16-month trend line that traders should then watch for any potential Bull Flag activity and this warning remains valid.

Trading volume was higher last week but remains below the 200 MA and below the revised bear trend line.

 

S&P500 ETF: SPY weekly: volume up last week BUT remains below trend:

:

The index closed just above 4,150 so this will be the support level to monitor for any new make or break.

Bullish targets: any bullish hold above 4,150 would bring 4,200, the recently broken 16-month support trend line, 4,250 and 4,300 back into focus.

Bearish targets: any bearish break below 4,150 would bring 4,100 into focus.  After that, watch whole-numbers on the way down to the weekly chart's 61.8% Fibonacci retracement level, near 3,000.

  • Watch 4,150 for any new make or break.

 

 

 

ASX-200: XJO: The index closed with a small, bullish weekly candle and at a new all-time High on higher volume but, despite this bullish close, the XJO broke below a 5-week support trend line. Price closed just above the 16-month support trend line though so this will be the region to monitor this week.

As mentioned over recent weeks:

  • It has taken a long time for the XJO to break and hold above the pre-GFC High region and, in this regard, it has lagged well behind most other global stock indices. However, any new hold above this 7,200 region to see out the month could well mark the beginning of a new trading range for the index and put it in catch-up mode with its peers.
  • S&P have upgraded the Australian outlook from 'Negative' to 'Stable' so watch for any impact this may have on market sentiment for the XJO.

Trading volume was a bit higher last week and above the bear trend line BUT watch for any 200 MA breakout.

 

XJO weekly: keep watch for any new b/o back above the 200 MA:

 

 

Keep in mind that the recent Golden Cross still remains valid. The Golden Cross is a bullish signal where the 50 SMA crosses above the 200 SMA. Such crosses are often, but not always, followed by a decent bullish run so these crosses are worth noting:

 

XJO daily: the recent Golden Cross remains valid for the time being:

 

Bullish targets: Any bullish bounce up from the 16-month support trend line would bring 7,300 and 7,400 back into focus.

Bearish targets: Any bearish break below the 16-month support TL would bring 7,200 and the previous 2020 High of 7,197.20 into focus. After that, watch the pre-2020 High of 6,893.70, the pre-GFC High of 6,851.50 followed by 6,800 and 6,700.

  • Watch the 16-month support TL for any new make or break:

 

 

 

Gold: Gold closed with a large, bearish weekly candle and gave around $100 following the break below the 11-week support trend line. The metal closed down near the 61.8% Fibonacci of this 11-week swing High move, circa $1,170, so this is the horizontal level to watch in coming sessions for any new make or break.

As mentioned over recent months: The activity below $1,900 acts as further evidence in support of the longer-term Inverse H&S thesis that I have been discussing as an option here for many months.

The weekly chart still has the look of a broad Inverse H&S pattern; or some may see this as a broad Cupping style pattern. Both are rather similar though as they are bullish patterns and suggest follow-through to the order of magnitude of the depth of the Cup / height of Head. In this case, that move is of around either $800 - $900. Keep watch of $1,900 now that price action is trading back above this neckline region!

$1,900 remains the region in focus for any bullish Cup or Inverse H&S breakout:

  • Any break back above $1,900 would support the Cup pattern thesis.
  • Any hold below $1,900 would support the Inverse H&S pattern thesis.

Traders need to watch this $1,900 level over the coming sessions especially as the US$ index is still below the recently broken 10-year support trend line:

  • any US$ hold below the multi-year support trend line could help send Gold higher.
  • any US$ move back above this support trend line could keep Gold range-bound. This would help to further develop the Inverse H&S pattern.

The daily chart reveals the importance of the $1,670 level so this continues to be a 'line in the sand' support level to monitor. Any new weekly close below the $1,670 level would bring $1,500 into greater focus. The two weekly charts show that $1,500 is:

  • near the 61.8% Fibonacci of the Aug 2018 - Aug 2020 swing High move.
  • forms the lower boundary of the Inverse H&S pattern I have had on my charts for many months.

There are revised 4hr chart trend lines to monitor for any new breakout and note the look of a bullish-reversal descending wedge here so keep an open mind. I have applied a Fibonacci retracement to the 4hr chart and the start point for the tool is always an issue. I decided to map the most recent swing Low move, that of the last two weeks, but mapping back an extra week would not have changed the outcome that much anyway.

Bullish targets: any bullish 4hr chart trend line breakout would bring $1,800 and $1,850 into focus as the latter intersects with the 4hr chart's 61.8% Fibonacci.

Bearish targets: any bearish 4hr chart trend line breakout would bring $1,750 into focus. After that, watch whole-numbers down to the $1,670 support level.

  • Watch the 4hr chart trend lines for any new breakout:

 

 

 

 

EUR/USD: The EUR/USD closed with a large, bearish weekly candle and gave a trend line breakout move that extended for around 220 pips. Price action ended up just below the 1.19 level making this the level to watch for any new make or break.

NB: Note that the longer-term target for any continued bullish movement following the previous break of the 13-yr trend line is the monthly chart's 61.8% Fibonacci, near 1.40. This trend line breakout was flagged back in a post on August 2nd 2020. Price at the breakout was around 1.17 and has reached up as far as 1.23, a move of around 600 pips, so this has been a breakout worth monitoring.

There are revised 4hr chart trend lines to watch for any new breakout and note the look of a bullish-reversal descending wedge here so keep an open mind.

Bullish targets: Any bullish 4hr chart wedge trend line breakout would bring the recently broken 16-month support trend line, 1.20 and 1.21 into focus. After that, watch the recent High of 1.235 and whole-numbers on the way up to a previous weekly chart High, circa 1.26, and for any continued push up to 1.40.

Bearish targets: Any bearish 4hr chart wedge trend line breakout would bring 1.18 into focus.

  • Watch 1.19 and for any new 4hr chart wedge trend line breakout:

 

 

 

AUD/USD: The Aussie closed with a large, bearish weekly candle and below 0.75 making this the level to watch for any new make or break.

NB: The longer-term target for any bullish continuation from the weekly/monthly chart's Descending Wedge breakout is the weekly 61.8% Fibonacci, near 0.90. This monthly wedge trend line breakout was also flagged back in the post on August 2nd 2020. Price at the breakout was around 0.71 and has reached up as far as 0.80, a move of around 900 pips, so has been another breakout worth monitoring.

There are revised 4hr chart trend lines to watch for any new breakout and note the slight look of a bullish-reversal descending wedge here, too, so keep an open mind.

Bullish targets: Any bullish 4hr chart wedge trend line breakout would bring 0.76 and 0.77 into focus. After that, watch whole-numbers on the way back to the weekly chart's Descending Wedge breakout target of 0.90.

Bearish targets: Any bearish 4hr chart wedge trend line breakout would bring 0.74 into focus. After that, watch whole-number levels on the way down to 0.65 as this is near the 61.8% Fibonacci of the March 2020 - Feb 2021 swing High move see daily chart).

  • Watch the 4hr chart trend lines for any new breakout:

 

 

 

AUD/JPY:  The AUD/JPY closed with a large, bearish weekly candle and gave a trend line breakout move that extended for around 200 pips. The 82 level is the next major support region to monitor.

As noted over recent weeks:

  • The weekly chart reveals that the 85 level has been a significant reaction zone for the AUD/JPY and has been resistance for the last three years; this level was peppered many times throughout 2018 but could not be broken. The next major level above 85 is 90 so watch this target level if 85 is broken.
  • AUD/JPY traders also need to keep an eye on the sentiment with stocks though, especially the S&P500 index, as the two are generally highly aligned; as the chart below reveals. Any pause or serious pullback with stocks might render similar for the AUD/JPY:

 

AUD/JPY versus S&P500 (gold line): a high degree of positive correlation:

 

There are revised 4hr chart trend lines to watch for any new breakout and note the slight look of a bullish-reversal descending wedge here too so keep an open mind.

Bullish targets: Any bullish 4hr chart wedge breakout would bring 83 and 84 S/R into focus as the latter is near the 4hr chart's 61.8% Fibonacci. After that, watch the key 85 level followed by whole numbers on the way up to 90 S/R.

Bearish targets: Any bearish 4hr chart wedge breakout would bring 82 S/R into focus. After that, watch whole-numbers on the way down to 76 as this is still near the recently broken 7-yr bear trend line, and then 70 as this is now near the 61.8% Fibonacci of the March 2020 - March 2021 swing High move.

  • Watch for any 4hr chart wedge breakout:

 

 

 

NZD/USD: The Kiwi closed with a large, bearish weekly candle and gave a trend line breakout move that extended for around 180 pips. Price ended up down near 0.69 making this the one to watch for any new make or break.

There are revised 4hr chart trend lines to watch for any new breakout and note the slight look of a bullish-reversal descending wedge here too so keep an open mind.

Bullish targets: Any bullish 4hr chart wedge breakout would bring 0.70 and 0.71 back into focus.

Bearish targets: Any bearish 4hr chart wedge breakout would bring 0.69 into focus. After that, watch whole-number levels on the way down to 0.63 as this is near the 61.8% Fibonacci of the March 2020 - Feb 2021 swing High move.

  • Watch for any 4hr chart wedge breakout:

 

 

 

GBP/USD: The Cable closed with a large, bearish weekly candle and gave a trend line breakout move that extended for around 250 pips. Price closed right on 1.38 making this the level to watch for any new make or break.

NB: The longer-term target for any bullish continuation above the previously broken 14-yr trend line, noted here in my article on December 20th, is the monthly chart's 61.8% Fibonacci, near 1.75. Price action at the initial breakout was around 1.35 and has reached up as far as 1.42, a move of 700 pips, so this trend line breakout was a great clue about things to come and the target for this move has not even been reached yet!

There are revised 4hr chart trend lines to watch for any new breakout and note the slight look of a bullish-reversal descending wedge here as well so keep an open mind.

Bullish targets: Any bullish 4hr chart wedge breakout would bring would bring 1.39 and 1.40 S/R into focus as the latter is near the 4hr chart's 61.8% Fibonacci. After that, watch whole-number levels on the way up to 1.50 as the latter is a previous S/R region on the weekly chart. Any bullish continuation after that would bring whole-number levels on the way up to 1.75 into focus.

Bearish targets: Any bearish 4hr chart wedge breakout would bring 1.37 into focus. After that, watch whole-number levels on the way down to 1.25 as this is near the 61.8% Fibonacci of the March 2020 - Feb 2021 swing High move.

  • Watch for any 4hr chart wedge breakout:

 

 

 

USD/JPY:  The USD/JPY closed with a bullish weekly candle and just above 110 keeping this as the horizontal support level to watch for any new make or break.

NB: The bullish weekly-chart descending wedge breakout was first noted in my article of January 31st. Price action at the initial breakout was around 104.5 and has reached up as far as near 111, a move of around 650 pips, so this trend line breakout was a great clue about things to come!

There are 4hr chart trend lines to monitor for any new breakout.

Bullish targets: Any bullish bounce up from 110 would bring 111, into focus. After that, watch whole-numbers on the way up to 115.

Bearish targets: Any bearish 4hr chart trend line breakout, below 110, would bring a multi-week support trend line, 109 and 108 into focus.

  • Watch 110 and for any 4hr chart trend line breakout:

 

 

 

GBP/JPY: The GBP/JPY closed with a large, bearish weekly candle and gave a trend line breakout move that extended for around 280 pips. Price closed just above 152 making this the level to watch for any new make or break.

NB: The longer-term target for any bullish continuation above the previously broken 40-yr trend line, noted in my post of January 3rd, is the weekly chart's 61.8% Fibonacci, near 170. Price action at the time of this breakout was near 141 and has reached up as far as 156, a move of around 1,500 pips, and so is another trend line breakout that has proven to be worthwhile monitoring.

There are revised 4hr chart trend lines to watch for any new breakout and note the slight look of a bullish-reversal descending wedge here as well so keep an open mind.

Bullish targets: Any bullish 4hr chart wedge breakout would bring 154 into focus as this is previous S/R and near the 4hr chart's 61.8% Fibonacci. After that, watch 155 and 156 followed by whole-number levels on the way up to the weekly chart's 61.8% Fibonacci, near 170.

Bearish targets: Any bearish chart wedge breakout, below 152, would bring 151 into focus. After that, watch the 6-month support trend line and whole-number levels on the way down to 136 as this is near the 61.8% Fibonacci of the March 2020 - March 2021 swing High move.

  • Watch 152 and for any 4hr chart trend line breakout: