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Fundamental Analysis & Market Sentiment

I previously wrote on Sunday, Nov. 10, 2024 that the best trade opportunities for the week were likely to be:

• Long of Bitcoin in US dollar terms. Bitcoin has risen by 12.55% over the past week.
• Long of the S&P 500 Index. The Index fell by 2.30% over the past week.
• Long of the Nasdaq 100 Index. The Index fell by 3.51% over the past week.

The weekly gain of 6.74% equals 2.25% per asset. Meanwhile, last week’s key takeaways were as follows:

1. US CPI (inflation) – all the inflation metrics were exactly as forecasted, and the annualized rate rose to 2.6%.
2. US PPI – this came in as expected, reinforcing no news on inflation.
3. US Retail Sales – this came in slightly stronger than expected, at a month-on-month increase of 0.4% compared to the forecasted 0.3%. This may increase the chance of a rate hike by the Fed at its December policy meeting.
4. UK GDP – this came in considerably worse than expected, showing a month-on-month contraction of 0.1% when an increase of 0.2% was expected. This increases the chance of a rate cut, and it has helped make the pound the weakest of all major currencies right now.
5. Australian Wage Price Index – this came in a fraction lower than expected at a quarterly increase of 0.8%. In a very small way, this may increase the case for a further rate cut.
6. New Zealand Inflation Expectations – this came in at 2.12%.
7. UK Claimant Count Change (Unemployment Claims) – this came in more or less as expected.
8. Australian Unemployment Rate – this came in as expected at 4.1%.

Last week, the most important factors driving the market were not so much economic data, but a growing digestion of what the Trump/Republican victory in the US will mean economically and for markets generally. The strong slump in stock markets towards the end of the week, especially in the US, should be cause for concern, as the major indices have almost retreated back to where they were when news of Trump’s victory began to emerge.

The Week Ahead: Nov. 18-22, 2024

The coming week’s schedule is lighter, with the most important scheduled events likely to be inflation data releases in the UK and Canada. Next week's events include the following:

1. UK CPI (inflation)
2. Canada CPI (inflation)
3. UK Monetary Policy Report Hearings
4. US Unemployment Claims
5. UK Retail Sales
6. Canada Retail Sales
7. US, German, UK, French Services & Manufacturing PMI

Monthly Forecast for November 2024

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I made no monthly forecast for November, as the long-term trends in the Forex market were too unclear at the time.

Weekly Forecast for Sunday, Nov. 17, 2024

I made no weekly forecast this week, as there were no unusually strong directional price movements over the past trading period, which is the basis of my weekly trading strategy.

Last week, the US dollar was the strongest major currency, while the British pound was the weakest. One third of the most important Forex currency pairs and crosses changed in value by over 1%.

Key Support/Resistance Levels for Popular Pairs

Technical Analysis - US Dollar Index

Last week, the US Dollar Index printed a large bullish candlestick that broke out beyond the resistance level at 105.81, as well as the upper trend line of the formerly dominant consolidating triangle chart pattern, which can be seen in the price chart below. These are bullish signs, but it should be noted that the candlestick has a large upper wick, showing that the dollar struggled to hold some of its earlier gains as it consolidated towards the end the week.

The price is now above its levels from both three months ago and six months ago, suggesting a long-term bullish trend in the greenback, which should be exploitable.

The strong US dollar is supported by the expectation that the new Trump/Republican control of the executive and legislature in the US will lead to a more hawkish monetary policy. This has been evidenced by the strong increase in US Treasury yields over recent weeks.

I have plenty of technical and fundamental reasons to be bullish on the US dollar. The only bearish note comes from the price not clearing the one-year+ high at 107.00, which was previously a major bearish inflection point, so I would be more bullish above the 107.00 level if the price gets established up there.

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EUR/USD

Last week, the EUR/USD currency pair printed a relatively large bearish candlestick, which made the lowest weekly close seen in one year. The weekly candlestick closed not far from its low, although there is enough of a lower wick on the candlestick for it to be worth noting.

The price is below its levels from both three and six months ago, which is my preferred metric for calling a long-term bearish trend. The US Dollar Index is also in a long-term bearish trend. A final bearish signal is that the 50-day moving average has crossed below the 100-day moving average, which validates the trend.

So, there are plenty of reasons to go short here, but I remain concerned that the price area being reached was a bullish inflection point when it was last tested, around the $1.0500 area, and there may still be demand here. This concern is strengthened by the fact that for almost two years, the price has ranged approximately between the levels of $1.0500 and $1.1250.

The best approach here is to look for short swing trades from retests and rejections of resistance levels above the recent price.

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GBP/USD

Last week, the GBP/USD currency pair printed a large bearish candlestick, making the lowest weekly close seen in six months. It was the largest bearish candlestick range in several months, suggesting strong bearish momentum. The weekly candlestick closed near its low, and the British pound was the weakest of all major currencies last week. The price is similarly below its levels from both three and six months ago.

There are several bearish technical signs to note. Turning to fundamentals, one of the reasons the pound is weak is that the Bank of England may be forced to cut rates more quickly after last week’s very poor UK GDP data, which showed a contraction of economic activity over the month. The weakening British economy may require a faster rate cut, which would help sink the pound.

The US dollar also remained strong following the Republican victory in the US general election, so the price could continue falling for several reasons. However, I don't want to be short here until the trend is established for longer – I like to see the 50-day moving average below the 100-day moving average before going short. Day traders may be interested in this pair on the short side.

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USD/JPY

The USD/JPY currency pair gained last week in line with the general rise in the US dollar, but the duo gave up most of its gains by the end of the week, as can be seen by the large upper wick on the most recent weekly candlestick shown within the price chart below.

The moving average positions still need to be fully bullish for the long-term, so I do not see this pair as fully trending. Additionally, the price is above its level of three months ago but still needs to reach its level of six months ago, reinforcing the lack of true trend. European currencies like the euro are considerably weaker than the yen.

So, although there are reasons not to trade this pair for trend or momentum, what it does have – in conjunction with almost all the yen crosses – is a high level of volatility, making this an interesting currency pair for Forex day traders to focus on.

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USD/CAD

The USD/CAD currency pair made a strong gain last week, as it made a bullish breakout to a new four-year high price, which is a significant long-term high price. The weekly close was located quite near the top of the weekly range, which is another bullish sign.

The technical picture could hardly be more bullish and is supported by the fundamental picture, which sees a strong US dollar boosted by the upcoming Trump presidency and Republican Congress, and also a weak Canadian dollar, which is being driven lower by the global decline in the price of crude oil, which closed last week at its lowest weekly closing price in 18 months.

There are many reasons to think about going long here, but remember that this currency pair typically trends little as the American and Canadian economies are so intertwined. However, there are periods in which this is not true. As we have seen some divergence between the Federal Reserve and the Bank of Canada on monetary policy in recent months, this may be such a period now.

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Bitcoin

Bitcoin saw another week of extraordinary gains as it powered to new all-time highs, topping to date above $93,000. The price rose by more than 10% over the week.

There is no reason not to be bullish, except that the price is now not far from the huge six-figure number at $100,000. If the price arrives at, or very close to, that point, we will likely see massive profit taking as there will be a 25% gain within just a few weeks, an enormous rise in value for any asset. So, this leg of the bull run, or maybe this whole trend, maybe does not have much further to run.

Bitcoin received a significant boost from the election victories of President Trump and Congressional Republicans in both Houses. Republicans are seen as more likely to favor lighter regulation of cryptocurrency, so their ascendancy has boosted both crypto in particular and risk sentiment in general, which also helps a risky asset like Bitcoin.

I think it is smart to be long of Bitcoin, just be mindful of $100,000 as a potentially strong barrier. With such momentum and strong gains, a trend or momentum trader should be interested.

Note that Bitcoin ETFs are not getting the full gain made by the underlying, not in some way, so if you can afford it, you might want to buy Bitcoin futures instead of a Bitcoin ETF or even spot Bitcoin. There are Bitcoin micro futures available on the CME, which are only sized at 10% of the value of one Bitcoin.

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Nasdaq 100 Index

The Nasdaq 100 Index fell last week, especially on Friday, when it made its strongest daily fall since September. The daily chart below shows that after making a new record high following the Trump/Republican victory in the US election, the price printed classing topping price action triggered the big drop at the end of the week.

The price is now almost where it was when it became clear Trump had won the Presidency, which is an ominous sign for the market. It was expected Trump would boost stocks quite strongly, but if the price falls just a bit further, we will be in negative Trump territory.

There is a long-term bullish trend here, so there are still plenty of reasons to expect the price to turn bullish again.

The price is now approaching a critical technical area just below the big, round number at 20,000 – there is a confluence here of an obvious horizontal area of support and the lower trend line of the linear regression channel, which I have drawn to cover the recent bullish leg of the price action. If the price continues to fall and gets established below 19,800, it might quickly fall considerably.

I do not see the Nasdaq 100 Index as a buy for now, especially below the 19,800 mark.

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Bottom Line

I see the best trading opportunities this week as

• Long of Bitcoin in US dollar terms.
• Short of the EUR/USD currency pair.

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