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5 Things to Watch Next Week: Saudi Arabia and Iran, Bitcoin in Correction, Stocks Left Behind, Junk Bonds, and the Dollar Rally

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1.            A New King in Saudi Arabia and a New Order in the Middle East?

The restructuring of the Saudi Arabian leadership by crown prince Mohamed bin Salman entered the next stage in the last couple of weeks, and the implications of the “Game of Thrones” of the Middle East won’t stop on the borders of the country or the region for that matter. With the conflict between Iran and the Kingdom escalating in an accelerating pace in Yemen, Qatar, Syria, and now Lebanon, things could get chaotic quickly, especially if the prince fails to cement his power in the coming period.

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The superpowers, the US, China, and Russia have vast interests in the region, and with Israel also thrown in the mix (as an ally for the Kingdom, for the time being), it’s not hard to imagine a broader conflict. As the Saudi-US relations are boiling under the quiet surface, with the ongoing shale oil war, the coalition-lines are blurred at best. Oil would be the knee-jerk bet to hedge against an escalation in the region, and sure enough crude prices are on the rise recently, but the questionable fundamentals in the energy segment could steer capital towards the traditional safe-haven of gold and the Yen.

2.           Bitcoin Tanks as Traders Run for the Exits (and into Bitcoin Cash)

Bitcoin spiked as low as $5600 today in early trading as the quick and deep correction that we have been anticipating in the coin arrived. This time around altcoins were mostly left out form the crash, with Bitcoin Cash being in the center of the action. The forked coin briefly surged past Ethereum in market capitalization as the tectonic shift away from its Big Brother fueled an unprecedented speculative rally in BCH, pushing its value above the $30 billion mark.

While the real value of Bitcoin Cash is questionable, the correction in BTC was baked in the cake, and the current trading-theme of BCH could evaporate quickly as selling dries out in Bitcoin. That said, the most valuable coin reached a severely overbought state and more downside is likely for it in the coming week. With that in mind, altcoins still look like a safer bet, even after the bullish move in several of the major coins.

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BTC and BCH, 4-Hour Chart Analysis

3.           The Narrowest New All-Time High Ever

Last week marked another record high for the most important US stock indices, but there is a catch; the recent rally was the weakest in history regarding market breadth, with the fewest stocks above the 50-day Moving Averages. While passive investment funds and momentum players amplified the leadership of the most valuable companies, the self-reinforcing cycle is successfully hiding the weakness under-the-hood, at least for now.

That said, the end of this week brought an increase in volatility to Wall Street, and together with other signs, an important top might already be in. The constructive setup that developed in August in equities is a thing of the past, and now the short-term outlook is also negative, together with the hostile investment conditions. While outright shorting is not an easy strategy, further reducing one’s exposure to stocks and gravitating towards tangible assets is advised here.

 Stocks Above the 50-day MA, Daily Chart

4.           High Yield Bonds Smashed Lower but There is Much More to Come

Junk bonds, corporate bonds with the worst outlook, have severely underperformed the US stock indices lately, and that is usually an early sign of risk aversion among smart money investors. This coupled with the internal weakness is a major red flag, and a much more imminent one than the overvaluation that we have been observing for a long time now.

The epicenter of the current “everything bubble” is definitely the global bond market, with absurd valuations across the board. As an example, the European junk bond market now implies a -1.2% chance of default in the segment (yes, negative). Granted, another analyst says that the methodology is wrong, so it is actually 0.5%… Whichever is correct, the monster bubble that the central banks created will collapse, it’s only a question of timing.

HYG (Junk Bond ETF), Daily Chart

5.           Dollar Rally or Just a Bounce?

The Dollar recovered some of its deep losses in recent weeks, but the GOP’s struggle with the tax reform, and especially the likely delay of the corporate tax cut weighed on the currency this week. Despite the two days of losses the uptrend that developed this autumn remains intact, and the continued hawkish outlook regarding the Fed’s monetary policy could fuel another leg higher in the Greenback. Also, the Euro’s strength is at least in part, built on sand, as the structural problems are nowhere near solved in the monetary union, and the Dollar’s investment outlook still looks way more promising.

Dollar Index (DXY), Daily Chart

Key Economic Releases Next Week

Day Country Release Expected Previous
Monday JAPAN BOJ Governor Kuroda Speaks
Tuesday AUSTRALIA NAB Business Confidence 7
Tuesday CHINA Industrial Production 6.3% 6.6%
Tuesday GERMANY Prelim GDP 0.6% 0.6%
Tuesday UK CPI Index 3.1% 3%
Tuesday UK PPI 0.8% 0.4%
Tuesday EUROZONE ECB President Draghi Speaks
Tuesday EUROZONE Flash GDP 0.6% 0.6%
Tuesday GERMANY ZEW Economic Sentiment 19.8 17.6
Tuesday US PPI 0.4% 0.1%
Wednesday JAPAN Prelim GDP 0.4% 0.6%
Wednesday AUSTRALIA Wage Price Index 0.7% 0.5%
Wednesday UK Average Earnings 2.1% 2.2%
Wednesday UK Unemployment Rate 4.3% 4.3%
Wednesday UK Claimant Count 2,400 1,700
Wednesday US CPI Index 0.1% 0.5%
Wednesday US Core Retail Sales 0.2% 1.0%
Wednesday US Retail Sales 0.00% 1.6%
Wednesday US Crude Oil Inventories 2.2 mill
Thursday AUSTRALIA Unemployment Rate 5.5% 5.5%
Thursday AUSTRALIA Employment Change 18,900 19,800
Thursday UK Retail Sales 0.2% -0.8%
Thursday CANADA Manufacturing Sales -0.4% 1.6%
Thursday US Unemployment Claims 236,000 239,000
Thursday US Philly Fed Index 24.3 27.9
Thursday US Capacity Utilization 76.3% 76%
Thursday US Industrial Production 0.5% 0.3%
Friday EUROZONE ECB President Draghi Speaks
Friday CANADA CPI Index 0.1% 0.2%
Friday US Building Permits 1.25 mill 1.23 mill
Friday US Housing Starts 1.19 mill 1.13 mill

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Analysis

Technical Analysis: Bitcoin Up Again as Altcoins Mixed in Volatile Trading

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Bitcoin is at a new all-time high today, although the momentum of today’s move is far below from what we saw recently, and the coin only managed to reach a marginal record high yet again. BTC is now worth $300 billion, and it is still trading right at the short-term trendline, inside a rising wedge pattern that shows a clear momentum divergence.

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With the short-term trend still being intact further gains are still possible, but as all the majors are overbought from a long-term perspective, we still advise investors to wait for a better buying opportunity before adding to their holdings. Primary support is still found near $13,000, with further levels at $11,300, $10,000, $9000, and stronger levels at $8200 and $7700.

BTC/USD, 4-Hour Chart Analysis

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 XRP entered a volatile short-term correction after its two-day surge after giving a short-term sell signal yesterday, and the coin spiked back towards $0.60 before settling down just below yesterday’s highs. The long-term setup also turned overbought thanks to the almost 300% rally, and now investors should reduce their holdings, even as further gains are still possible. Major support is still found at the prior high near $0.4250 and in the $0.30-$0.32 range.

XRP/USDT, 4-Hour Chart Analysis

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Analysis

Cryptocurrency Analysis: Ripple Continues Rampage as Litecoin and Ethereum Enter Correction

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Ripple remained in the center of attention in the segment after breaking out to a new all-time high yesterday, and the coin almost doubled in value, climbing above the $0.80 level. The currency concluded a 6-month long consolidation pattern with the move after being the only major on a long-term buy signal in our trend model.

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XRP gave a short-term sell signal today, while turning neutral regarding the long-term setup. Investors now shouldn’t add to their positions, although further gains are still possible, and reducing holdings somewhat is a good idea here. Major support is still found at the prior high near $0.4250 and in the $0.30-$0.32 range.

XRP/USDT, 4-Hour Chart Analysis

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While Bitcoin stagnated, and Bitcoin Cash jumped, Ethereum, Litecoin, Dash, and IOTA has been drifting slightly lower, although the recent gains are still mostly intact, and the basic setup in the segment is unchanged.

Litecoin fell below the $300 level after yesterday’s consolidation, and the coin faced strong selling pressure in the latter half of the session. The currency remains extremely stretched regarding the long-term momentum indicators, and although the short-term uptrend is still intact, a deeper correction is likely in the coming weeks, with key support levels found at $125 and $100, and weaker levels at $260 and $170.

LTC/USD, 4-Hour Chart Analysis

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Daily Analysis: Dollar Falls, Gold Jumps after Yellen’s Final Move

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Wednesday Market Recap

Asset Current Value Daily Change
S&P 500 2668 -0.02%
DAX 13125 -0.45%
WTI Crude Oil 56.65 -0.68%
GOLD 1258.00 1.35%
Bitcoin 16,100 -6.32%
EUR/USD 1.1842 0.73%

The Federal Reserve hiked interest rates as expected today, and although the central bank’s monetary statement was slightly more hawkish than expected, the market’s reaction didn’t reflect the much-anticipated move. The worse than expected Core CPI reading that underlined the low-inflation narrative weighed on the recently strong Greenback, while stocks were unchanged after decision and bonds gained ground as yields retreated.

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EUR/USD, 4-Hour Chart Analysis

The major indices are hovering near their all-time highs with the DOW leading the way higher, hitting a new record for the second day in a row. While volatility Is expected to remain low as we approach the end of the year, market internals and valuation levels are still concerning from a long-term perspective, and stocks outside the US are also negatively diverging. The action in crude oil could be slightly more interesting as the commodity is starting to act in a slightly bearish manner after a grinding multi-month rally.

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WTI Crude Oil, 4-Hour Chart Analysis

The Brexit process is still in the center of attention in Europe, although volatility took a nosedive on the old continent as well, and it’s unlikely that the Christmas period will be much different, given the predictable drop in volumes and trading activity. The date of the next election in the financially and politically troubled Italy has been set to March 4th next year, and the early date caused some turmoil in the countries assets, which dragged the Euro Stoxx 50 lower today, together with the DAX and the other major indices.

Cryptocurrencies

As the total market cap of the crypto-market crossed the incredible $500 billion mark, Ripple, NEO, and Ethereum made headlines with lofty gains in the face of the severely overbought readings elsewhere in the segment. While XRP and NEO are still not overbought from an investment perspective, Ethereum reached our final target for its break-out and triggered a long-term sell signal.

ETH/USD, 4-Hour Chart Analysis

The previously surging IOTA continued its correction, Litecoin consolidated in a relatively narrow range, while Dash, ETC, and Monero scored marginal new highs before turning lower together with BTC. The most valuable coin that has lost some of its momentum “mojo” in recent days fell back below last week’s highs, and that could mark a failed break-out and a start of the deeper correction that seems more and more likely.

BTC/USD, 4-Hour Chart Analysis

Key Economic Releases on Wednesday

Time, CET Country Release Actual Expected Previous
11:30 UK Average Earnings 2.5% 2.5% 2.3%
11:30 UK Claimant Count Change 5,900 3,300 6,500
11:30 UK Unemployment Rate 4.3% 4.2% 4.35
15:30 US Core CPI 0.1% 0.2% 0.2%
15:30 US Crude Oil Inventories -5.1 mill -3.6 mill -5.6 mill
21:00 US Fed Rate Decision 1.5% 1.5% 1.25%
21:00 US FOMC Statement

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