US Indices Closed At New Highs: Do We Hold Or Fold?

Expected rate cuts from the Fed and further easing from ECB helped stocks to rally in the lead-up to US Independence Day celebrations. Most notably, all three major US indices closed at record highs in unison, providing the President more gleeful tweets through to the early hours.

The trend on the S&P500 remains undeniably bullish, although some measures suggest it could be a little overbought. But breaking to new highs is something we seem to be hearing more frequently. At least, it certainly feels that way. So we thought we’d take a look at past performance after hitting new highs, to see if it really is what it’s cracked up to be.

However, we’ll use a break of a 52-week high and assess forward returns between 1 to 20 days after, as this will provide more signals and allow us to assess the data with a more tradable timeframe in mind.

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Gold Explodes To 5-Year High Post-FOMC

During a busy session for Asia and no less than three dovish central banks, gold exploded to a 5-year high and stopped just shy of $1400. With an increasingly bullish trend structure on the monthly charts, we remain bullish after prices have had a chance to pause for breath.

The Fed had confirmed their dovish stance nearer the end of the US session, with nearly half of the voting FOMC members expecting two cuts this year. Shortly after, RBA’s Philip Lowe hit the wires to hammer home their dovish views and all but confirm another cut is on the horizon. And, let’s not forget that RBA teased the notion of QE in their June minutes, adding that “Lower interest rates were not the only policy option available to assist in lowering the rate of unemployment”. Not wanting to miss out, BOJ reiterated their ultra-easy policy and expect to keep ‘extremely low rates at least through spring 2020’. Given the backdrop of trade wars and deteriorating economic data, the pressure if building for BOJ to stimulate the economy further. And, of course this is all after Draghi shot down the Euro with potential for ECB to ease further, earlier this week.

Put together, the demand for gold has shot through the roof and pushed the yellow metal to an intraday 5-year high.

Starting with the bigger picture, we can see on the monthly chart that the fall from the all-time high stopped around the 50% retracement level, before grinding higher since the 2016 low. However, a series of higher lows have formed to show demand picking up into the 2014 high. Whilst this timeframe I too large to trade for many, the bigger picture suggests gold is trying to return to its secular bull-trend.

Switching to the daily chart shows the spike higher which momentarily touched a 5-year high. Given the strong fundamentals driving gold, we expect the trend to breakout in due course. However, gold appears technically over stretched over the near-term, especially since today’s high stopped just short of $1400 and has retreated below the 2014 high.

  • Given the strong resistance below $1400, we’d like to see prices pause for breath and build a new level of support, on lower volatility.
  • Ideally a retracement will form above the $1358.30 – $1366 zone before its next leg high.
  • If it can clear $1400, the August and May 013 highs come into focus around $1433 and $1487 respectively.

Related Analysis:
FOMC Recap: Fed Doves Play Catchup With Markets
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RBA Minutes Confirm They’re ‘More Likely’ To Ease Further | AUD/JPY, AUD/NZD, GBP/AUD

Summary From RBA Minutes on Monetary Policy

  • Members judged that a decline in interest rates was unlikely to encourage a material pick-up in borrowing by households that would add to medium-term risks in the economy
  • Risks to the forecasts for growth and inflation in both directions
  • It was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.
  • Lower interest rates were not the only policy option available to assist in lowering the rate of unemployment”.
  • In assessing whether further monetary easing was appropriate, developments in the labour market would be particularly important.

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Since breaking out of its 7-month range, copper has developed a bullish trend structure and is showing signs of a potential bull-flag above the breakout level. With the 20-day average also supporting, we’re looking for prices to eventually break higher after its period of consolidation.

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DXY: Seasonality Suggests Headwinds Around The 2018 Highs

DXY looks set to challenge the 2018 peak, although price action near-term could be stretched. Beyond February seasonality points lower, so how it reacts around the highs could be key as we head into March.

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