Daily Analysis: Stock Rally Cracks as Dollar Continues Higher

Wednesday Market Recap

Asset Current Value Daily Change
S&P 500 2719 -1.18%
DAX 12,435 -0.44%
WTI Crude Oil 61.59 -2.01%
GOLD 1317.00 -0.09%
Bitcoin 10,410 -2.63%
EUR/USD 1.2184 -0.42%

The divergences that we have been pointing out throughout the rebound in US stocks finally translated into broad weakness on Wall Street, with major indices trending lower all day and finishing the session with an ugly sell-off and a spike in volatility.

While the dip pushed back the Dow and the S&P 500 below the key levels that we have been monitoring for the last two weeks, the Nasdaq remains relatively strong, not far off the all-time highs set in January.

S&P 500 Futures, 4-Hour Chart Analysis

That said, given the weakness in the broader indices, and especially small caps and non-US stocks, we remain defensive towards equities, and we expect volatility to stay elevated with a likely test of the correction lows in the coming weeks.

Russell 2000 (Small Cap Index), 4-Hour Chart Analysis

Economic numbers were mostly negative today, but the most-awaited prelim US GDP print was perfectly in line with expectations, coming in at an annualized rate of 2.5%. Pending home sales missed the consensus estimate by a mile, adding to the realistic fears regarding the housing market that is showing signs of stress, as rates continue to rise across the curve.

While the trend in Treasury yields is clearly up, long-dated bonds showed intraday strength today, even as the short end of the curve remained under pressure. That perfectly fits Jerome Powell’s views that he expressed yesterday, as he confirmed that the Fed will stick with rising rates, despite the rise in market volatility.

2-Year Treasury Yield, 4-Hour Chart Analysis

While the market seems to believe what Powell said, the retreat in long-term yields together with stocks means that on the long run investors think that the central bank will be forced to ease once again, as the “everything bubble” deflates.

Forex Markets in Full Risk-Off Mode

USD/JPY, 4-Hour Chart Analysis

The trends that were clearly bearish in the realm of fiat currencies continued in earnest, today, with risk-on currencies getting another beating, and the Japanese Yen returning to its safe-haven throne, gaining ground against all of the majors.

USD/CAD, 4-Hour Chart Analysis

The US Dollar was the second best performing top currency, as it hit the highest level against the Euro since mid-January, while scoring 10-week highs compared to the Australian Dollar and the Canadian Dollar.

The Aussie and the Loonie were under pressure not just because of the late-day stock rout but also thanks to the huge drop in crude oil, and the relative weakness of gold which underperformed the Yen despite the risk-off shift.

Cryptocurrencies

The major coins had a dominantly bearish session, and the after-hours session saw another wave of selling in the segment following reports regarding the SEC’s probe into ICO’s. So far the losses remain limited, and volatility is still consistent with a bullish trend as well, and until major support levels don’t start crumbling, we remain positive on the outlook for BTC and most of the altcoins.

BTC/USD, 4-Hour Chart Analysis

Bitcoin dipped below $10,500 again following the US close, and it will be interesting to see if the news inflicted sell-off will keep the most valuable coin below the key short-term level. For now, the currency remains bullish both long- and short-term after last week’s correction with all eyes on the $11,300 resistance and the $10,000 support.

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Author:
Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.