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Daily Analysis: Stocks Stay Bullish as Dollar Rally Fizzles

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Thursday Market Recap

Asset Current Value Daily Change
S&P 500 2502 -0.12%
DAX 12600 0.25%
WTI Crude Oil 50.55 -0.22%
GOLD 1295.00 -1.61%
Bitcoin 3658 -5.89%
EUR/USD 1.1936 0.35%

The Fed’s “historic” monetary meeting resulted in a strong initial move by the Dollar and a less pronounced dip in equities, as markets were surprised by the hawkish tone of the central bank. The move in the currency got mostly reversed against the Euro and the Pound today, while the Yen remained under pressure, together with gold. The safe-haven assets hit new multi-week lows, with the precious metal dipping below the key $1300 level, probably concluding its correction.

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Donald Trump announced a new wave of sanctions against North Korea recently, but the move didn’t cause major movements in the markets, and most asset classes are near their pre-Fed levels, as only short-dated Treasuries were re-priced thanks to the hawkish Fed statement.

DXY, Daily Chart Analysis

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Central bankers caused some turmoil down under as well, with the Aussie and the New Zealand Dollar reversing some of their recent gains after the RBA governor Lowe’s dovish words.  Stock markets barely budged, proving their relative strength yet again, and Japanese and European equities hit new rally highs in early trading. The major US indices are still just below their all-time highs, with continued strength in the financial sector, and a slightly lagging tech segment.

AUD/USD, 4-Hour Chart Analysis

Cryptocurrencies

Bitcoin and Ethereum are leading the market lower yet again as the forces that led to the deep correction remained dominant even after last week’s crash and the following surge. Almost all of the major coins are still in short-term downtrends, with only IOTA and Dash showing meaningful relative strength before today’s bearish shift. BTC quickly declined below the key $3800 support, and it’s now likely headed towards $3500 while a re-test of the crash lows is also in the cards, despite the much-improved long-term prospects.

BTC/USD, 4-Hour Chart Analysis

Technical Picture

The DAX continues to drift higher in the face of the short-term overbought readings on the MACD. The German index is very close to the next major resistance level at 12,650 and a rally towards the 12,825 level is also very likely in the coming week. Another leg higher in the Euro could hold the rally for a while, but as long as the relative strength of European equities persists, short-term traders should buy the dips.

DAX, 4-Hour Chart Analysis

Key Economic Releases on Thursday

Time, CET Country Release Actual Expected Previous
Tent. JAPAN BOJ Rate Decision -0.10% -0.10% -0.10%
Tent. JAPAN Monetary Statement
14:30 CANADA Wholesale Sales -1.5% -0.9% -0.5%
14:30 US Unemployment Claims 259,000 300,000 284,000
14:30 US Philly Fed Index 23.8 17.2 18.9

Key Economic Releases on Friday

Time, CET Country Release Expected Previous
9:30 GERMANY Manufacturing PMI 59.0 59.3
9:30 GERMANY Services PMI 53.8 53.5
10:00 EUROZONE Manufacturing PMI 57.2 57.4
10:00 EUROZONE Services PMI 54.8 54.7
14:30 CANADA CPI Index 0.2% 0.0%
14:30 CANADA Retail Sales 0.4% 0.7%

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Analysis

Buy FDS, PPC, BERY, and IIVI for the short-term

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The US tax reforms received a major boost on Thursday when a measure approved by the Senate, enabled the Republicans to proceed with the tax cuts, without the support of the Democratic party.  Suddenly, passage of the tax cuts looks more plausible.

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Key observations

  1. Positive news is flowing on the tax reforms front.
  2. Tax reforms are likely to boost the S&P’s earnings significantly
  3. The stocks are likely to remain buoyant in the final quarter of the year
  4. Buy FDS
  5. Buy PPC
  6. Buy BERY
  7. Buy IIVI

Goldman Sachs believes that if corporate tax rates are reduced from 35 percent to 20 percent, it will increase the annual per-share earnings of the S&P 500 by $15. Consequently, the stock market will look a lot less richly valued on a forward price to earnings basis.

With this bullish backdrop, the stock markets are likely to remain buoyant in the short-term. However, we don’t advise investing for the long-term at these levels. We believe that the markets will fall within the next few months, offering an opportunity to buy stocks at lower levels.

Therefore, we shall trade this market and attempt to ride the momentum. We have selected stocks that are making new 52-week highs because they have a favorable tailwind and are likely to participate in the rally, along with the S&P 500.

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So, without further ado, let’s check out the stocks.

FDS – Buy 185.76, Stop Loss (SL) 174, Target 204 and 216

Weekly chart

The stock’s history shows that it tends to rally for a few years and then enters into a shallow correction or consolidation. We find three such instances in the past decade. The stock has been in a consolidation since end-2015. Two attempts, one in September 2016 and the second in March 2017, failed to sustain the breakout.

However, the stock again broke out in end-September and extended the rally last week. It is likely to start a new uptrend now and we plan to hop along for a ride.

Daily chart

The stock broke out of the bullish ascending triangle formation on September 26. Thereafter, it faced resistance at the $184 levels, from where the bears attempted to sink the stock, back into the triangle.

However, the bulls provided support at the $176 levels and the stock broke out of the overhead resistance on Friday. It is now likely to rally towards its first target objective of $204. The pattern target on a breakout from the ascending triangle, however, is higher at $216.

Therefore, we recommend a buy on the stock at the current levels with a stop loss of $174. We don’t want to hang on to the stock if it falls back into the triangle once again. The stock has a risk to reward ratio of 1:1.5 at the first target objective and a ratio of about 1:2.5 at the second target objective.

PPC – Buy 31.04, SL 27, Target 37

Weekly chart

The stock rose sharply from end-2012 to end-2014. Thereafter, it corrected and entered into three-year long consolidation, during which, it remained range bound between $17 on the lower end and $27.5 on the upper end. PPC formed a double bottom at $17.3 levels and the pattern completed when the stock broke out of $27.5 in mid-August of this year. Subsequently, the stock completed a successful retest of the breakout levels of $27.5 and rose to multi-year highs last week. We, now, expect the stock to start a new uptrend.

Daily chart

The stock broke out of the overhead resistance on August 15. However, the stock faced considerable resistance following the breakout. It remained sandwiched between $28 and $30 for almost two months. Finally, on October 18, the stock broke out of the range and extended its rally on October 20.

It has a pattern target of $37, which is close to the lifetime highs. There is no significant resistance in between, therefore, we recommend a buy on PPC at the current levels of $31.04. The stop loss can be kept at $27, a level not seen for more than two months. The trade offers us a risk to reward ratio of about 1:1.5.

BERY – Buy 59.88, SL 56, Target 67

Weekly chart

BERY has been in a strong uptrend since 2016. It has a clear pattern. It rallies and then corrects towards the 20-week exponential moving average (EMA) and occasionally to the trendline drawn. On completion of the correction, it again resumes its uptrend.

Recently, the stock had again corrected to the trendline, from where it found support and broke out to new lifetime highs last week. We expect this trend to continue until the stock breaks and closes below the trendline support. We want to enter this stock as it has re-established its uptrend.

Daily chart

The stock broke out of the overhead resistance of $58.95 on October 06. Afterwards, it successfully retested the breakout levels and has resumed its uptrend. We can buy the stock at the current levels of $59.88 and keep a stop loss of $56. We shall close the position if the stock falls below the trendline. Our target objective is $67. The trade offers us a risk to reward ratio of about 1:2.

IIVI – Buy 43.3, SL 39, Target 52

Weekly chart

The stock bottomed out in October-2014 around the $10.78 mark. Thereafter, it started a new uptrend that continued till February of this year, after which, the stock entered a period of correction. $41.1 has acted as a stiff resistance on the way up. However, last week, the stock broke out to new highs and we expect it to continue higher.

Daily chart

On the daily chart, we find that the stock has formed a bullish inverse head and shoulders pattern. The pattern completed with a breakout of the neckline on September 27. Thereafter, the stock successfully completed a retest of the neckline. The stock has a pattern target of $52. We want to enter the stock at the current levels and keep a stop loss of $39, which is just below the low created on October 19. This gives us a risk to reward ratio of greater than 1:2.

 

 

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Analysis

Notable Bitcoin Price Growth Events in October

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October has been an interesting month for Bitcoin, with growth of about 40% so far, breaking a market cap of over $101,881,681,652.

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But if you are looking at Bitcoin long-term, this is more than just numbers now. Yes, Bitcoin did experience some explosive growth this month (and has been this entire year), but we shouldn’t let that distract us from some of the main components that will fuel Bitcoin’s growth in the long-term.

  1. Not only did the price break $6,000 per Bitcoin for the first time ever, we started to see Bitcoin’s market cap rate surpass that of big banks such as Goldman Sachs ($93 billion) and Morgan Stanley ($89 billion). While comparing the market capitalization of a cryptocurrency with that of publicly traded companies doesn’t make much financial sense, it’s entertaining to watch financial institutions stress out about Bitcoin.

For example, the CEO of JPMorgan Chase Jamie Dimon can’t stop talking about Bitcoin and venting his frustration with the topic by calling Bitcoin a “fraud” and threatening to fire any employee trading it for the simple reason of “being stupid”.

We also saw Goldman Sachs state that Bitcoin is not the “new gold” in terms of currency, calling it volatile and the methods of storage vulnerable. Goldman Sachs also stated that precious metals like gold are still the best way to store value-long term. While this may be historically accurate, the world hasn’t seen anything like Bitcoin before. Understanding Bitcoin’s growth a matter of equipping yourself with the perspective and ideology that Bitcoin (or  if/when whatever cryptocurrency evolves to take its place) can play a substantial long-term role in how society views money.

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Traditional financial institutions such as investment banks are at an interesting point. Cryptocurrencies such as Bitcoin and Ripple are inherent threats to the very foundation that these multi-hundred-billion dollar companies operate on, and they can’t be defeated because of their decentralized nature. Additionally, many of the same banks that are threatened are also investors looking to reap the rewards of Bitcoin’s explosive growth, and also are incubating similar blockchain concepts to not get left in the dust.

  1. People are starting to look at Bitcoin as an oasis of solidity in an otherwise tumultuous alt-coin market.

In September, we saw an unprecedented crackdown on ICOs and alt-coins by government entities. China and South Korea outright banned the sales of ICOs, and the United States warned investors to be skeptical. While there are hundreds (soon to be thousands) of dubious ICOs, this crackdown did have effects on how investors view legitimate alt-coins. For this reason, many investors flocked to Bitcoin and were able to enjoy some solid growth in October.

So, that brings up the question of whether Bitcoin will be a source of stability in the future. Although the price has gone up a lot this month, that doesn’t make it any less volatile.

  1. Bitcoin still has a long way to go. One of the key pieces of news in October that influenced the writing of this piece was the prediction that Bitcoin will hit $27,000 in four months by an avid cryptocurrency investor and enthusiast called Trace Mayer. While Twitter is filled with all kinds of Bitcoin hooplah, Mayer’s prediction was based on a simple 200 day moving average. This 200 day moving average would put Bitcoin well over $27,000.

Four months is close enough in the future to anticipate, so I’m really interested to see where BTC ends up between then and now. The counter-argument against this would be that Bitcoin may just be experience a state of exponential growth and will cool off, but that’s what people have been saying for years.

It’s also important to note that Bitcoin’s main competitors for value storage and a medium of exchange are the US Dollar and gold. Bitcoin was able to earn a market capitalization of over $100 billion in just a few short years, but this hardly holds a candle to its competitors. The US Dollar money supply circles around $12,500 billion. All the gold that has ever been mined is worth around $8,000 billion.

This means that Bitcoin, this innovative new technology with exponential growth is only around 1% of its two main competitors. This leaves Bitcoin a long way to grow, and I personally don’t think it’s going to slow down anytime soon.

Final Thoughts

By all means, this isn’t a conclusive argument for where Bitcoin’s price will end up. These are just a few points I want to bring up regardless of whatever you choose to do with your money.

There are a handful good of arguments on both sides of the Bitcoin growth discussion, but it all comes down to how well you can either respond to short-term events, or how cemented you are in your long-term beliefs.

Personally, I don’t recommend day-trading or trying to “game” exchanges for the simple fact that losing money sucks, and this is an easy way to lose money.

However, what I can advocate is the thorough research of the fundamental factors influencing the growth of particular cryptocurrencies and how the world responds to it. For example, in October we saw investment banks start commenting more about Bitcoin (which at the very least hints at more media coverage), how many users decided to stick with Bitcoin instead of liquidating for fiat during rough alt-coin times, and some explosive growth that backs up the lofty price goal assumptions by crypto enthusiasts.

 

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Analysis

5 Things to Watch Next Week: Earnings Bonanza, Bitcoin in Danger Zone, Trump’s Tax Reform, The Dollar Rally, The US Yield Curve

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1.            $4.5 Trillion in Market Cap Reporting

So far, the US earnings season has been a positive affair, as the most important companies, especially mega caps, beat the estimates across the board, lifting the major indices to new all-time highs in the process. Next week, is calendar will be full of another huge batch of key earnings, such as Microsoft (MSFT), Google’s parent Alphabet (GOOG), ExxonMobil (XOM), Amazon (AMZN) and Visa (V).

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With the overbought readings in the Dow, the S&P 500, and the Nasdaq, there is not much left in the tank for the equity rally, and the long-term prospects are not better by any means. That said, trying to pick a top in such a rally is futile, but controlling the Fear of Missing Out is not an easy feat. The correction will come, without a doubt, and it will either bring a trading opportunity as in August or a confirmation for the bears.

Dow 30 Index, Daily Chart Analysis

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2.           Bitcoin Reaches Target but Uptrend Remains Intact

The new all-time highs in BTC have been the most important move in the cryptocurrency segment this week, even as Ethereum‘s major update made headlines earlier on. As the short-lived break-out of ETH and some of the other major altcoins faded away, Bitcoin’s dominance reached levels not seen for months, surpassing 58% as the coin reached the $6000 level towards the end of the week. While the long-term picture is clearly overbought for BTC, we wouldn’t rule out another leg higher towards the range extension target at $7000, but pocketing most of the recent gains is probably the way to go. The quick and deep corrections in the segment always come when the last bears had given up hope, and we are close to that state.

BTC, Daily Chart Analysis

3.           Trump Tax Plan Might Live After All

As the Senate passed the 2018 budget resolution this week, the new tax bill got much closer to passing this year than previously thought. While a lot of experts agreed that the controversial proposal had a good chance of failing at one of the many legislative hurdles, but he Senate’s decision opened up the way for a short-cut and if the GOP speeds up the process of writing the bill, the much-awaited tax cuts could arrive very soon. The next step is to pass the budget bill in the House, while tackling the opposition towards the actual bill in the Senate and the House. So while the process will be grueling, the market already hailed the first step with a rally, and the progress could be a major driver for stocks and the Dollar in the coming weeks.

4.           The Dollar Showing Stability

With the focus still on the next Fed Chair, and the above-mentioned tax reform, the Greenback had a choppy but slightly bullish week, even compared to the relatively strong Euro. The Yen, the Pound, and the smaller majors all lost considerable ground compared to the USD, with the New Zealand Dollar falling the most after the announcement of the new coalition. Technically speaking, the Dollar is not out of the woods, but it seems that a higher low formed on the daily chart of the DXY, and that could have a major implication for all markets. Should the Index post a new swing high next week, the door could open for a major rally in the battered currency.

Dollar Index (DXY), Daily Charts

5.           The US Yield Curve is Collapsing

As short-term Treasury yields are rallying thanks to the hawkish tone of the Fed, and the modest economic numbers, the longer end of the curve is lagging severely. That represents the doubts regarding the long-term growth potential of the US economy, and is usually a strong precursor of a looming recession.

Some analysts argue that raising interest rates this late in the cycle is a major policy error, but with the extremely loose monetary policy of recent years, the normalization must begin, or the Fed will be out of options in the case of an economic shock. In any case, long-term investors should keep a close eye on Treasuries, as the bond market is usually a better predictor of troubles ahead than the stock market.

Key Economic Releases Next Week

Day Country Release Expected Previous
Monday CANADA Wholesale Sales 1.1% 1.5%
Tuesday CHINA PPI 6.3% 6.3%
Tuesday GERMANY Manufacturing PMI 60.1 60.6
Tuesday GERMANY Services PMI 55.5 55.6
Tuesday EUROZONE Manufacturing PMI 57.9 58.1
Tuesday EUROZONE Services PMI 55.7 55.8
Wednesday AUSTRALIA CPI 0.8% 0.2%
Wednesday GERMANY IFO Business Climate 0.4% 0.2%
Wednesday UK Prelim GDP 0.3% 0.3%
Wednesday US Core Durable Goods Orders 1.1% 2.0%
Wednesday CANADA BOC Rate Decision 1.0% 1.0%
Wednesday CANADA BOC Statement
Wednesday US New Home Sales 556,000 560,000
Wednesday US Crude Oil Inventories -5.7 bill
Thursday EUROZONE ECB Rate Decisiion 0.00% 0.00%
Thursday EUROZONE ECB Press Conference
Thursday US Unemployment Claims 236,000 222,000
Thursday US Pending Home Sales 0.7% -2.6%
Friday US Advance GDP 2.7% 3.1%

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