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US500 breaks 3400 as blue wave becomes consensus

The US share market staged a strong start to the week, with the S&P 500 (US500) once again taking out the February highs and closing above the 3400 handle with a 1.8% rise on the day. If we look back to mid-September, price failed to move higher after a similar move, so what’s the case for the US500 this time?

From a technical perspective, take note of how the 5-day EMA (green line) has supported the daily candles since late September. Compared to the last break of 3400, the 5-EMA this time is higher than the 20-EMA (blue), which indicates stronger momentum from the bulls this time. Where I become concerned is price moving below the 5-EMA on daily closing basis, which may hint at trend reversal. I'm bullish until then. 

Let’s also consider yesterday’s newsflow that accompanied the bullish session. Speaker Nancy Pelosi has hinted chances are higher of a stimulus package passing through Congress, and President Trump was discharged from Walter Reed hospital to return to the White House.

But perhaps more interesting is that as polling shows Biden holding his strong lead over Trump, markets are beginning to accept this as consensus. And you’re right - usually the prospect of higher taxes and increased regulation on finance, tech, and energy companies would be bad news for the stock market. This year might be different.

The bullish case for US stocks - and the economy in general - is to spend the way out of this crisis. Although the Trump administration has overseen record deficit spending, the democrats have shown in ongoing fiscal talks that they’re prepared to do even more. Biden’s plans for presidency include stimulus spending of up to $4 trillion over the next ten years.

Of course, a clear win either way reduces the chances of a contested result - a dreaded outcome that would throw markets into uncertainty for several weeks.

The VIX remains high at 27.94% so whichever way the US500 moves, expect it to be a bumpy ride and consider position sizing accordingly, especially as the US election draws closer. The record highs at 3588 are a huge level to beat.

Sean MacLean

Research Strategist

Review: NZDUSD double top plays out. What’s next?

Last week I identified a double top formation coupled with bearish divergence on the NZDUSD daily chart. As price approached and fell through the neckline at 0.66175, selling pressure kicked in and the bears took this one back towards the August lows around the 0.65 handle.

Well it all played out as the bears may have expected, although we didn’t quite reach my target of 0.64900 - a reminder to myself to set my take-profits at about 80% of an expected price move, as countless others may have algos set to kick in just above such targets.

But the forming double top pattern wasn’t the only bearish signal - there was further conviction with bearish divergence appearing on the MACD oscillator (lower pane). We saw a lower high for the September bull run than that of August. This indicates a weakening trend and can signal a move lower.

The fundamental set-up helped too. We were also seeing US stocks move lower on risk aversion and election hedging, and in turn selling pressure on high beta currencies like the aussie, the kiwi, and emerging market currencies.

So is it back to the bull trend from here? Was this just a healthy correction - or are markets in for more volatility? A lot is certainly hinged on the US dollar outlook from here. If the greenback continues its downtrend, the NZD will gain in turn. But what we have seen in the asian session today is price move higher and test and reject both the June trend-line and the double top's neckline 0.66175 - which occurred as US stock futures slid during the first presidential debate.

If the bulls can’t take out this level, price may hold in the lower range for some time yet. A break back into the ascending channel, and above the 50-EMA (purple) and the kiwi should have room to charge higher. 

Sean MacLean

Research Strategist

US500 breaks higher with 3400 in sight

A bullish session on Wall Street and the S&P 500 (US500) may have found its mojo again. The US500 has broken out of the September descending channel on the daily chart, after impressive breadth on the day with more than 90% of its stocks closing higher.

Price is now eyeing a move back toward the pre-COVID highs just below the 3400 handle. The bulls failed to hold this level mid-September - so is a breakout of the descending channel the conviction markets need to trade higher again? Turnover for the S&P 500 was a touch below the 30-day average in yesterday’s session, so I’ll be watching how price develops today and throughout the week.

But it wasn’t only a break out of the descending channel, price also took out the 20-day EMA (blue), 50-EMA (purple), and 5-EMA (green) with a higher close. With the 20 and 50 getting closer to each other, the bulls will not want to see them cross over, as this would be a bearish signal of possible trend reversal.

However plenty of uncertainty persists. As the US election approaches, investors are bracing for what the possible administrations may mean for financial markets, as well as the likelihood of a contested result. Daily coronavirus cases in the US remain above 30,000 per day. The US stock market could well be in for some choppy movement over the coming weeks. 

Looking more broadly across the stock market, small-cap stock index the Russell 2000 (US2000) has reached the top of its own descending channel after defending the 200MA last week, although price has not yet broken out of the bearish channel. This is one to keep an eye on - a bullish break from the small-cap index may give the US500 bulls further encouragement.

Sean MacLean

Research Strategist

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