High volatility was the theme on Friday in the Forex, equity and debt markets. Friday’s trading session can basically be described as a two-sided affair. Surprised? No. The markets were ready to move, but were just waiting for a few kind words from a key Fed official.
At first the equity markets rallied on news of a better than expected Second Quarter GDP report, but turned lower ahead of Fed Chairman Bernanke speech at the central banker’s conference in Jackson Hole, Wyoming. Once it became clear to traders that Bernanke was going to be more upbeat than usual, stocks bottomed and mounted a strong rally into the close.
T-Bonds, which were already in the hole after the GDP report, accelerated down during Bernanke’s speech and the U.S. Dollar slowly begin to take on a bearish appearance. Inside of the 9am to 10:30am CDT time period, looking at the charts, clearly someone turned on the risk demand switch.
The economically sensitive Euro rallied, paused, and then rallied again to close a little better for the week. The British Pound fought back from a morning sell-off to finish slightly lower. The Japanese Yen felt selling pressure from greater demand for risk. The strongest rallies, however, were in the higher yielding Australian Dollar and New Zealand Dollar.
During his speech, Bernanke clarified a few points. One, he said that the Fed decided to purchase more longer-term debt with proceeds from its bonds that mature for both technical and stimulus reasons. Two, he explained his current view of the economy, and three, he said that the Fed is not out of bullets and that it has several options.
Bernanke, however, may have helped turn the stock markets higher when he said the Fed has the willingness to use more quantitative easing if necessary. The fact that he didn’t suggest that it “was necessary” may have been the key factor triggering Friday’s turnabout. Another potentially bullish factor was the fact that the Fed did not change its 2011 forecast.
Technically here is what we are looking at: the September E-mini S&P 500 held the low for the week at 1037.00. This kept Wednesday’s closing price reversal bottom formation intact. The key to triggering a strong rally remains the follow-through to the upside.
At this time there are three areas that have to be overcome in order to trigger a breakout to the upside and perhaps a retracement back to 1082.25. First, the market has to take out Thursday’s high at 1061.75. Second, the Gann angle at 1065.25 has to be pierced with conviction. Thirdly, the market has to close above the 50% level at 1065.25. If these three things occur then, in my opinion, the shorts will be forced to cover.
Higher yielding currencies traded better, driven up by greater demand for risky assets. Friday morning’s better than expected U.S. GDP report helped ignite the initial rally, but it was positive comments from Fed Chairman Bernanke which triggered the second leg up.
Technically the rally in the Australian Dollar was setup on Wednesday with its closing price reversal bottom pattern. This bottom at .8770 helped form a range with the main top at .9221. This also helped create a retracement zone at .8995 to .9049. This retracement zone is the first upside target of the current rally.
Friday’s rally was also triggered by a technical breakout through a key downtrending angle from the .9221 top at .8921 today. Based on my price and time calculations, the next major price cluster is at .9049 on August 31.
A key asset allocation shift took place in the markets earlier in the week that played a role in Friday’s markets. On Wednesday, T-Bonds topped and stocks bottomed simultaneously. This was the signal that risk was back on, but it took the positive comments by Bernanke to give traders a little clarity and conviction to play the long side of the equities. Stocks should continue their rally this coming week which should keep pressure on T-Bonds and the U.S. Dollar. The only market likely to weaken against the Dollar will be the Japanese Yen. A shift in sentiment and an intervention could tank the Yen.
Although it is a holiday week, volatility should be high especially during the beginning of the week. After a mid-week slowdown, look for volatility to increase again on Friday when the August U.S. Non-Farm Payrolls report is released.
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