Trader’s view – Technical levels bite as Wall Street sells-off

American stocks fall

Wall Street looks poised to register its worst daily performance since the start of the year. The technical action was sweet: another early challenge of 2815 – the price ran slightly above that – before the bears swooned, and traders “pulled the trigger”. It’s been a day of selling since, with the S&P 500 down 0.6 - 0.8%, at time of writing. It’s nothing to be too concerned about, of course. This is nothing like the behaviour witness at the end of last year. It’s just that the price action has the commentariat ready to call the long-awaited reversal in US, and global equities. The closing price will be crucial today, but a bearish engulfing candle already signals looming weakness.

Bulls fail to break technical resistance

It’s the considerable lack of upside momentum, coupled with the breadth of the sell-off, that is noteworthy. After all, again, the S&P 500 is only down 0.6% on the day. The RSI is pointing its head downwards, though, clearly breaking with its recent upward trend. Intraday breadth is very poor: only around 20% of stocks are higher for the session, and every sector is presently in the red. Right now, the triple top at 2815 – the formidable level that saw the bulls bail-out on as many occasions in Q4 2018 – has proven its might. The discourse might once again shift from here to where the next low could be registered.

Asian and Europe market activity was solid

The activity in US markets comes at the end of 24 hours that was rather friendly to Asian and European equities. Volume was low in European trade – a touch of Mondayitis perhaps. But Chinese and Hong Kong traders were voracious: volumes were 216 per cent higher than the 100-day average in China’s equity markets. Traders in Japan and here in Australia were more settled. However, the appetite for risk was still present: the Nikkei was up over 1 per cent on the day; and though the ASX 200 failed to hold its break above 6230 resistance, a 0.40% gain for Australian stocks amounted to a respectable session for the bulls.

Possible trade-war resolution stoked sentiment

As would be well known to anyone in markets, the logic for yesterday’s upside in Asia and Europe was that a true resolution in the US-China trade-war is upon us. The news broke before Australian market-open, and the positivity carried through the day. As alluded to, the ASX 200 fed on the sentiment, clocked most its gains in early trade, before admittedly grinding lower throughout the day. Some of the cyclical sectors, along with growth stocks led the intraday leaders in nominal terms. Consumer discretionary, materials and industrials stocks were all up, while the information technology sector, as well as the biotechnology stocks in the healthcare sector, also put-in significant rallies.

ASX to follow Wall Street’s lead

Alas, with Wall Street’s bearish day, the ASX 200 looks poised to adopt the negative sentiment. According to SPI Futures, the index ought to fall approximately 40 points at this morning’s open. The ASX 200 is flashing its own signals that momentum is slowing, brandishing a break in its RSI. But up until yesterday, the bulls were dogged in their conviction to keep the market above the trendline established from the Christmas Eve low. A technical “golden cross”, whereby the index’s 50-day EMA crosses above its 200-day EMA, transpired out of yesterday’s trade – generally considered a good indication of the prevailing bullishness, and therefore further upside, in the market into the medium term.

Australian economic to grab attention

Nevertheless, many of the buy signals may well break down this morning, as traders mull the prospect of a general, short-term retracement in global equities. The next level to watch for the ASX 200 might be previous resistance at 6105. Although this will be a curious narrative to watch unfold, from a local perspective, and maybe just for the next day or two, the news flow might be more preoccupied with matters relating to core-macroeconomic concerns in Australia. Backing on from yesterday’s mixed Building Approvals and historically weak Corporate Profits data, today will see the release of local Current Account figures, before attention turns to the RBA’s monthly meeting this afternoon.

The RBA and the range-trading AUD

It’s well known that the RBA will not move interest rates today. Instead, as storm clouds build on the Australian economic horizon, traders will be surveying the bank’s commentary, especially as it relates to their recent adoption of a “neutral” bias. The market presently thinks that the probability of a rate cut from the RBA before the end of the year is around 80 per cent. The concerns centre on the dimming global economic outlook, coupled with the growing pressure falling property prices will have on already strained domestic demand. The Australian Dollar has proven resilient recently and will come in focus today around the RBA release: analyst’s will continue to watch the 0.7050 – 0.7200 range moving forward.