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When starting the week, it is a good idea to look at the big picture of what is developing in the market as a whole, and how such developments and affected by macro fundamentals, technical factors, and market sentiment.

Fundamental Analysis & Market Sentiment

I wrote in my previous piece on July 30, that the best trade opportunities for the week were likely to be:

• Long of the NASDAQ 100 Index if we get a daily close above 15938. This did not set up.
• Long of the S&P 500 Index if we get a daily close above 4595.8. This did not set up.
• Long of CC1! Cocoa Future following a daily close above 3525. This produced a losing trade of 1.07%

My forecast produced an overall loss of 1.07%, averaging a loss of 0.35% per highlighted asset.

Market sentiment has deteriorated quite severely, partly due to Fitch’s downgrade of its US credit rating, and partly due to a feeling that market rallies are due a substantial correction. The fact that we are now into August when bullish appetites tend to become limited is also likely to be a factor.

There is little more to say about the market right now. It may well be that the rallies of recent months continue after this bearish retracement runs its course, although due to historical seasonality, this might not happen until September. However, we are due for the release of US CPI (inflation) data this week, which might bring a more bullish impetus to the market.

Last week’s major news in the Forex market was the Bank of England’s rate hike of 0.25% to 5.25%, although this was widely expected. This was seen as slightly hawkish as more members voted for the hike than were expected, and two members wanted a hike of 0.50%. We may start to see the Bank of England take a position as the most hawkish major central bank, as British inflation remains so relatively high.

Markets will probably start the week continuing the risk-off selloff, with a stronger US Dollar. There is little likely to change this until Thursday’s release of US CPI data, in which annualized inflation is expected to rise slightly from 3.0% to 3.3% with a monthly rise of 0.2%. If the data is lower, this could spark a recovery in risk appetite.

Last week’s other key data releases were:

1. US Non-Farm Payrolls, Average Hourly Earnings, and Unemployment Rate – these came in lower than expected except for average hourly earnings, which rose by 0.4% month-on-month.
2. US JOLTS Job Openings – met expectations.
3. Chinese Manufacturing PMI – met expectations.
4. Australian Cash Rate and Rate Statement – the RBA passed on an expected rate hike of 0.25%, giving a dovish surprise which accelerated the recent fall of the AUD.
5. Swiss CPI (inflation) - met expectations.
6. US ISM Services PMI - met expectations.
7. US Unemployment Claims – met expectations.
8. US ISM Manufacturing PMI – met expectations.
9. Canadian Unemployment Rate – met expectations.
10. New Zealand Unemployment Rate – slightly higher than expected.

The Week Ahead: August 7–11

The coming week in the markets is likely to see a higher level of volatility than last week, as there will be a release of US inflation data. This week’s key data releases are, in order of importance:

1. US CPI (inflation)
2. US PPI
3. Chinese CPI (inflation)
4. UK GDP
5. US Prelim UoM Consumer Sentiment
6. US Unemployment Claims
7. New Zealand Inflation Expectations

It will be a public holiday in Australia and Canada on Monday, and in Japan on Friday.

Technical Analysis

US Dollar Index

The daily price chart below shows the U.S. Dollar Index rose in value a little last week continuing its short-term bullish trend. However, the last few days of the week printed a decline and even more significantly, appears as if it might have printed a new resistance level of 102.375 which is shown within the price chart below.

Although the Dollar seems to be in a long-term bearish trend evidenced by the descending wedge pattern, it should be noted that there is no real long-term trend, as the price is above its level from 3 months ago but below its level of 6 months ago.

Adding to the indecision is the fact that we now have support and resistance levels holding close by.

I see the US Dollar as evenly balanced, which means it is probably a good idea not to trade the US Dollar this week, unless we get some dramatic inflation news.

Nasdaq 100 Index

Last week saw a firm decline in the price of the Nasdaq 100 Index after reaching a new 18-month high two weeks earlier. This week closed firmly lower, printing a bearish engulfing bar. The candle closed very near the low of its range, which is a bearish sign.

The price may be overbought and due a deeper retracement, but it is important to remember that there is a strong long-term bullish trend that has seen massive gains during 2023, when this Index has increased in value by approximately 40%.

The next thing to watch will likely be whether the supportive area between 15260 and 15211 will hold if reached. A firm breakdown lower will likely be seen as a signal for medium-term investors to sell, which could then produce a further decline.

Alternatively, a bullish bounce from this area, or even from 15057, could be a buying opportunity which would pay off if the long-term bullish trend then starts to continue.

USD/JPY

The USD/JPY currency pair began the week rising strongly enough to look as if it might reach its long-term highs, but the end of the week saw the Yen bought as a safe haven, driving the price back down.

It is hard to say what will happen with this currency pair in the short term. Both currencies seem prone to uncertainty. However, it is clear that there is volatility, which is likely to continue, so this pair may be suited to short-term trading opportunities based on sentiment and momentum.

Cocoa

The price of Cocoa has been advancing strongly for a long time – since October 2022 – with a firm and predictable bullish trend. The price has risen by more than 50% during this period, which is a large rise.

The Cocoa futures price chart below shows a linear regression analysis study applied to the trend since October, showing the price action is very predictable and has remained within the regression channel, even breakout out above the channel’s upper trend line two weeks ago. This is suggestive of a persistent bullish trend.

However, it should be noted that last week’s candlestick is both a bearish pin bar and an inside bar, which is a bearish sign that a deeper retracement against the trend may now happen. Still, I think it is way too early to write off this long-term trend, so I will be prepared to take a new long trade entry if we get a daily close above the highest recent daily closing price.

There is strong global demand for cocoa and problems with some crops in Africa which are helping to drive the price higher.

Bottom Line

I see the best trading opportunities this week as:

• Long of the Nasdaq 100 Index if we get a bullish bounce at any of the key support levels mentioned.
• Long of CC1! Cocoa Future following a daily close above 3562.

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