Markets, including stocks, gold and currencies, were generally limited in consolidation mode last week. The news about the coronavirus vaccines hasn’t given sentiment another boost. Instead, investors are waiting for new inspiration. The dollar finished as the worst performer, but remained within the range of the previous week except against the Kiwi. The euro and the Swiss franc are the next weakest. Yen followed Kiwi as the second strongest, then Sterling.
While waiting for breakouts, below we’ll look at the outlook for stocks, yields, the dollar, gold and oil, and possible interactions. Signals are mixed for now, as bullish actions suggest a downside risk for the greenback. However, the weakness of gold indicates some resistance of the dollar. In addition, oil has struggled in the range, arguing that investors are not fully bullish. The same sentiment is reflected in the decline in 10-year yields.
DOW retreated after hitting a new record
DOW edged up to a new high of 29,964.29 last week, but fell quickly. Further consolidations are likely in the short term, with a risk of a deeper pullback. However, the outlook will remain bullish as long as the 55-day EMA (now at 28221.57) holds. The biggest test in the short term is projecting 38.2% from 18,213.65 to 29,199.35 from 26,357.01 to 30,340.30. A decisive breakout in this area will strengthen the bullish momentum in the medium term. However, sustained trading below the 55 day EMA will increase the odds of a near term reversal and focus on the support at 26143.77 which is relatively close to the 55 week EMA.
TNX has turned lower, but remains in the up channel
The 10-year yield moved lower last week, saying it was already rejected by key resistance at 0.957, although it briefly hit 0.975. Nonetheless, it remains comfortably in the short-term ascending channel, as well as the 55-day EMA (now at 0.791). The outlook remains optimistic for another hike. The breakout of 0.975 will focus on the key 55 week resistance of the EMA (now at 1.031). However, the firm break in the 55-day EMA will make the short-term outlook bearish for another lower leg as part of the recent consolidation. We don’t expect a support of 0.504 even then. But such a move could be accompanied by the start of a deeper pullback in equities, with the 55-day EMA breaking out in DOW as well.
Don’t expect an imminent breakout in the dollar index just yet
The dollar fell relatively correctively last week. While the near-term outlook remains bearish, the downward momentum does not yet justify an impending breakout. Instead, a firm break out of the 55-day EMA (now at 93.28) would extend the 91.74m consolidation pattern with another leg rising through the resistance at 94.30. If this happens, it should be accompanied by a drop in stocks and yields, a sign of a return to risk aversion. However, the decisive breakout of 91.74 will resume all of the 102.99 decline.
Gold pressured but stayed above key 1848 support
Gold was somewhat under pressure last week, but no committed sell-off pushed it through key near-term support at 1,848.39. Still, as it has remained below 55 days EMA (now at 1896.51), a downside breakout is slightly in favor. A firm breakout of 1848.39 would resume the decline from 2075.18, as a correction to the uptrend from 1160.17, to 55 weeks EMA (now at 1747.55). This would be a signal to confirm a rebound in the dollar, and possibly a short-term bearish reversal in stocks as well. On the other hand, a sustained breakout above the 55-day EMA could indicate that the dollar index is finally ready for a bearish breakout.
WTI struggled in range before key resistance
WTI crude oil also struggled in its lineup last week. The stay above the 55 day EMA (now at 39.73) is a bullish sign. However, given that it is now pressing the 55 week EMA (now at 42.23), we do not expect a strong breakout through resistance at 43.50 yet. Instead, a 55-day EMA break would extend the recent sideways model with another leg down. However, a sustained breakout of 43.50 could be a sign of a general sense of risk, which is accompanied by a resumption of the rally in stocks. This in turn could be a sign of a bearish breakout in the dollar index.
Weekly outlook EUR / CHF
EUR / CHF remained in lateral consolidation in a tight range last week and the outlook is unchanged. The initial bias remains neutral this week first and further upside is in favor with minor support at 1.0772 intact. The 1.0915 consolidation pattern should have ended with three waves at 1.0661. On the upside, the breakout of 1.0827 will target resistance at 1.0877 to confirm this bullish scenario. However, the breakout of the support at 1.0772 will likely extend the trend with another bearish leg and swing the bias down.
Overall, price actions from 1.0503 are still seen as a pattern for consolidation. With a cluster resistance of 1.1059 (38.2% retracement from 1.2004 to 1.0503 to 1.1076) intact, the downtrend of 1.2004 (2018 high) would extend further until ‘to 1.0503 lower at a later stage. However, a sustained breakout of 1.1059 / 76 will support the uptrend from 1.0503 to start a new uptrend and would aim for a 61.8% retracement to 1.1431 and above.