Stocks Surge on Earnings as Saudi Tensions Ease

US stocks started the session in positive territory following the positive earnings surprises by Goldman Sachs (GS) and Morgan Stanley (MS), and from then on, the floodgates opened and we saw the strongest rally on Wall Street since March. President Trump’s more diplomatic stance towards Saudi Arabia helped the bounce in stocks, together with the stability in Treasury yields, but the most important driver was the huge bearish move of last week in stocks.

The major indices all gained more than 2% amid the furious oversold bounce, with, unsurprisingly, the Nasdaq gaining the most on the day, but last week’s deep correction is still far from being erased, and given the negative market internals, we remain defensive towards equities, even regarding the short-term time-frame.

S&P 500 Index Futures, 4-Hour Chart Analysis

We were expecting a similar move since Thursday when stocks reached deeply oversold short-term momentum readings, and as we noted then, these rallies should be treated as selling opportunities, due to the broad technical weakness in emerging markets, Europe, and now on Wall Street as well.

The S&P 500 all but cleared the oversold short-term readings thanks to today’s surge and the preceding choppy consolidation phase, and now the index is near the levels where we would look for a swing high in the coming week. The Volatility Index (VIX) plunged back below, and its behavior in the coming days will be key in judging the real strength behind today’s move.

Russell 2000, 4-Hour Chart Analysis

In spite of the strong move in small-caps as well, the Russell 2000 continues to look wounded from a technical perspective, and the index is facing very strong resistance levels. According to almost all breadth measures, under-the-hood, things are also ugly, and even if the US bull market has legs, this correction is very unlikely to end with a V-shaped bottom, as a lot of healing would be needed to maintain a sustained rally.

Calm US Session in Currencies Amid Stock Surge

USD/JPY, 4-Hour Chart Analysis

Forex markets also saw corrective price action, although the main safe-haven assets, the Japanese Yen and gold gave back only a small portion of their recent gains. The Dollar finished little changed before tomorrow’s key FOMC meeting minutes, while the Pound pulled back after a positive European session.

We expect a larger move in the Greenback in the coming days, and the consolidation in Treasuries could also come to an end, and another leg higher in Yields could be the trigger that ends the oversold bounce in stocks.

Copper Futures, 4-Hour Chart Analysis

Commodities had a quiet and choppy session, except the still active gold, and although crude oil managed to bounce amid the risk-on shift, copper failed to build on its recent resilience. the industrial metal is still stuck in a bearish consolidation pattern, with all eyes on the $2.75 support and the $2.87 resistance.

The way Chinese assets will react to today’s rally will be crucial for the commodity, as a meaningful bounce could help copper to a new swing high, despite the bearish long-term pressures.

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.