US stocks received a boost yesterday due to ECB President Draghi, who said that low interest rates will remain for an extended period until signs of recovery are certain, a stark contrast to Ben Bernanke. This resulted in stronger speculation that Bernanke will choose to eat back his words and not execute the tapering timeline – sending US stock prices to a 2 week high. The rally that succeeded Draghi’s speech also allowed price to break higher from the previous consolidation ceiling for both the S&P 500 and Dow 30 (see hourly charts below), but price stabilized shortly afterwards due to the lack of trading activity on US Independence Day.
Currently, Asian session is still feeling the bullish sentiment brought about by yesterday’s European session. Nikkei 225 gaped more than 150 points higher on open, while Hang Seng Index jumped more than 200 points. This resulted in US stock futures climbing higher as well, placing bulls in the driving seat as we approach the big Non-Farm Payroll event risks later today. With ADP employment and Weekly Claims numbers coming in better than expected, expectations for a much stronger NFP has increased significantly, which brings higher downside risks. As the saying goes – the bigger the hope, the greater potential disappointment. Hence, traders need to be extra careful when interpreting market immediate reaction when the numbers are released. Should the figure be slightly stronger than the analyst consensus of 165K (which was polled before the ADP figures were released), there remains the chance that over eager speculators may be disappointed, and could result in snap sell-off of stocks immediately. To complicate matters further, there is still the issue of contraion behaviors surrounding Good/Bad news recently, which suggest that a stronger NFP may actually result in net selling-off of stocks as it encourages Bernanke to stick to his guns. With all these in mind, traders should preferably wait for clarity in the markets before jumping into the fray right away and automatically assume that price may go in a single direction after the news release.
Dow 30 Hourly Chart
From a technical perspective, price is finding support along the rising trendline that is newly formed. This trendline supports the bullish breakout of early week consolidation, and allows price to potentially negate the bearish cycle signaled by the Stochastic indicator.
S&P 500 Hourly Chart
The same interpretation applies to S&P 500. To further current bullish breakout, both stock indexes will need to bounce from the supporting trendline and break the previous swing high made during US midday yesterday. This will set up bullish acceleration to higher grounds and allow price to withstand any potential short-term bearish setbacks due to NFP later. If price remain around current levels, there is a risk that volatility post NFP may send price below the critical support (1,625 for S&P and 15,060 for Dow). As mentioned above, directionality may not be crystal clear following the news release due to multitude of reasons, as such traders may wish to seek further confirmation even if such technical levels are broken to prevent fakeouts and whipsaw actions later today.
On the USD front, the Greenback was stronger – having a positive correlation with US Futures. However, a large chunk of it can be attributed to the massive sell-off in EUR and GBP. Furthermore, US stock market wasn’t trading yesterday, hence putting in doubt whether correlation between USD and US stocks have truly shifted this time round. Nonetheless, traders should still approach tonight’s NFP with trepidation and be prepared that the correlation that we used to know may change drastically after today.