Asia Open: Room for bearish sentiments to unwind

Wall Street Wrap

Wall Street managed to extend its gains from last Friday, with the Nasdaq up 0.3%, S&P 500 rising 0.6%, and the DJIA advancing 0.9% overnight. Over the past week, we argue that extreme bearish sentiments and oversold technical conditions may likely offer room for a short-term tactical bounce on even marginally positive news. The catalyst came in the form of the US retail sales overnight.

While the headline retail sales increase of 0.2% fell short of the 0.6% consensus, market participants took solace in the stronger-than-expected 1% jump in the gross domestic product (GDP)-relevant ‘control group,’ which eased concerns about a severe slowdown in consumer spending. Nevertheless, while recession chatters may seem overblown for now, the US economy remains on a slowing trajectory, keeping valuations under close scrutiny. Favouring relatively cheaper value stocks over growth stocks has remained the preferred approach, with the S&P 493 contributing the bulk of the index’s overnight gains.

US indices

For the S&P 500, we continue to monitor whether the recent breakdown below key trendlines, such as the 200-day moving average (MA), is merely a flush-out or a more prolonged downturn. A V-shaped recovery, similar to October 2023, would support the flush-out scenario. But for now, the push to a new lower low may still warrant some caution and while there is room for recent recovery to extend further, any formation of a lower high will be on the lookout.

In the Nasdaq, an upward breakout from a falling channel signals a near-term shift in sentiment. On the four-hour chart, the relative strength index (RSI) has reclaimed its midline for the first time in three weeks. However, if this rebound is merely a dead cat bounce, resistance may emerge around the 20,300 level, aligning with the 38.2% Fibonacci retracement.

Asia session

The late-night gains on Wall Street are expected to carry into the Asian session, with Nikkei pointing to a 1.5% increase, ASX up 0.76%, and KOSPI up 0.76% at the time of writing. China’s plans to shore up domestic demand has been a boost to broader sentiments, and while policy support has been more structural than direct, they mark a step in the right direction, with room for more policy ramp-up further down the road.

A series of economic data releases has been encouraging as well, reflecting some policy success, with industrial production, retail sales and fixed asset investment surprising on the upside. No doubt there are still some patchy areas in terms of higher unemployment rate and falling housing prices in most major cities which underscore ongoing property sector pressures, but the totality of the risks may seem more measured than before.

The US Dollar continues to struggle, dragged lower by the softer US retail sales read, which raises more dovish Federal Reserve (Fed) prospects. At the Federal Open Market Committee (FOMC) meeting this week, policymakers are widely expected to keep Fed funds rate unchanged, but will likely signal an increased openness to rate cuts in response to growth risks.

Nikkei’s reversion to near-term higher-high-higher-low structure

For the Nikkei, a reversion to higher-high-higher-low structure on the four-hour chart may be encouraging, signalling a potential short-term recovery. Its four-hour RSI has also pushed above its midline, a level that has acted as resistance over the past month. This week, the Bank of Japan (BoJ) is expected to keep rates on hold, with any dovish stance on watch to provide a supportive backdrop for Japanese equities. Any retracement could be monitored for the formation of a higher low, potentially near the support confluence at around the 37,400 level.

ASX 200: Key psychological 8,000 level on watch

The ASX 200 has also recovered more than 2% over the over the past week, with the four-hour chart revealing a reversion in its RSI back above its midline as well. While that suggests near-term buyers’ control, a key psychological resistance confluence stands at the psychological 8,000 level, where a previous channel breakdown will leave it as resistance to overcome.