5 Things To Watch Next Week+ChartBook

Year-End Bounce Continues in Stocks or Bearish Seasonality Kicks In?

Nasdaq 100 Futures, 4-Hour Chart Analysis

While we were expecting a wild holiday week in stocks following the extraordinary December, the fact, that one of the most violent short-covering rallies ever happened on a Christmas week (just after the worst Christmas sell-off ever) was still surprising. The major US indices closed the week near their bounce highs, but given the extent of the rally, we might be only a few days away from the short-term top.

The move had all the characteristics of a bear market rally, and as it was the case since the end of the summer, we continue to view every rally as a selling opportunity in equities. The bullish December seasonality also turns sharply negative on the first few days of the year, but the size of the recent swings could mean that short-term technical factors will continue to outweigh seasonality.

Nevertheless, looking at the other key global markets, the bearish shift in risk assets remains dominant, and even if the current bounce proves more sustainable, traders should treat it as a counter-trend move. The Nasdaq has been a good predictor for risk assets in recent weeks, so should the tech benchmark start showing weakness again, selling might resume in stocks on Wall Street and globally.

Japanese Yen in For Further Gains?

USD/JPY, 4-Hour Chart Analysis

While the Japanese Yen pulled back amid the epic short squeeze in stocks, the main safe-haven currency rallied back quickly towards the end of the week, despite the relative stability in stocks. Although the USD/JPY pair was helped by the relative weakness of the Dollar, the other key Yen-related pairs behaved similarly, confirming that the rally was likely nothing more than an oversold bounce in risk assets.

We remain bullish on the Yen for the coming months, even if there will likely be violent pullbacks on the way. Currently, the main risk factor for Yen bulls is a possible trade deal between the US and China, and we could see signs of progress as early as next week, which could cause another short-term sell-off in the JPY.

That said, even a rapid deal wouldn’t change the bearish fundamentals, since we believe that the trade is just one giant red herring obscuring the debt- and bubble-related troubles.

All Eyes On Financials as Credit Markets Signal Trouble

XLF, 4-Hour Chart Analysis

While the European financial sector has been weak for ages, December saw a more than 20% drop in the sector in the US as well, and together with widening credit spreads, and the tightening financial conditions, that had analysts worried about the health of the financial system. Given the record levels of debt and the questionable credit quality globally, a pronounced economic slowdown will likely lead to a bigger than usual wave of defaults, and thus, a rough time for the financial sector.

The coming weeks could be crucial in deciding whether we are already seeing the start of a cyclical bear market in the sector, but from a technical standpoint, that’s exactly how it looks like. The XLF ETF fell straight through several support zones before bottoming out near $22, its lowest level since late-2016, and despite this week’s short squeeze, the chart of the financial ETF looks deeply wounded.

While the bounce could continue next week and in early January, we wouldn’t be buyers of the sector here, and should the ET F reach the $25 level, short positions could be opened by traders.

Gold Eyeing $1300

Gold Futures, 4-Hour Chart Analysis

Besides the Yen, gold has been the other major winner of the recent turmoil in equities and the dip in yields, and after holding up strongly against the struggling risk-on currencies, now, the precious metal is trending higher against the US Dollar as well. We still believe that long-term fundamentals are favorable for gold, and although the short-term rally is slightly stretched, a move above the $1300 level is still in the cards next week.

Things might get heated on the first days of the year, as volatility is expected to rise, and a spike above $1300 might be followed by a sharp pullback in the metal, due to the overbought momentum readings. Gold finished the week near a weaker resistance zone close to the $1280 price level, and above $1300, the yearly highs near $1350 lie ahead as strong resistance. Key support is found near $1245-$1250, and traders and investors could continue to buy the dips here.

Global PMIs and Job’s Friday in Focus

The recent months saw a distinct downturn in global economic activity, and Europe has been among the weakest regions. Next week, while we will only have 3 full trading days, the prelim and final readings of several key manufacturing and services PMIs will be released, and those could have a profound effect on prices across asset classes.

While the prelim US and British Manufacturing PMIs will likely have the biggest impact, the revisions of the Eurozone measures could serve with vital information as well, as should they confirm the sharp slowdown, European assets, especially the Euro could be under pressure again.

Friday’ session will be the busiest regarding economic releases, with the Eurozone CPI, the British Services PMI and the Canadian and US Employment Reports all coming out before the weekend. Fed Chari Jerome Powell is also scheduled to speak after the key releases, and especially a higher than expected hourly earnings reading could spark turmoil in financial markets, given the recent dip in yields.