Pull Back in Treasury Yields Boosted Stocks to New Record, Dollar Set Up for More Downside

Dollar tumbled broadly again as falling treasury yield pushed US and German stocks to new record highs. Near term trend in the greenback should have reversed, but it’s unsure whether it’s ready for medium term down trend resumption yet. At least, EUR/USD will have to break through 1.2 handle with some conviction, while Dollar index has to break through 91.30 support. Nevertheless, risk is on the downside for the greenback.

Staying in the currency markets, Canadian Dollar ended as the second weakest, followed by Swiss Franc. New Zealand and Australian Dollar ended as the strongest, following broad risk on sentiments, as well as solid economic data. Sterling was also setting the stage for a come back, but takes more time to consolidate the momentum. Euro and Yen ended mixed.

DOW and S&P 500 surged to new record, NASDAQ to follow soon

DOW and S&P 500 closed at new record highs last week as up trend reaccelerated. For now, near term outlook in DOW will stay bullish as long as 33227.78 resistance turned support holds. The whole up trend from 18213.65 is on track to 61.8% projection of 18213.65 to 29199.35 from 26143.77 at 37129.47 in the medium term.

Similarly, near term outlook in S&P 500 will remain bullish as long as 4068.31 support holds. The up trend from 2191.86 is on track to 100% projection of 2191.86 to 3588.11 from 3233.94 at 4630.19 in the medium term.

It appears that NASDAQ will likely follow soon, to resume up trend from 6631.42 through record high at 14175.11. The near term test lie in 61.8% projection of 10822.57 to 14175.11 from 12397.05 at 14468.91. Firm break there will solidify medium term up side momentum, for 100% projection at 15749.59 next.

European indices also closed sharply higher last week. In particular, German DAX accelerated to close at new record high at 15459.75. Near term outlook in DAX will remain bullish as long as 15144.11 support holds. Up trend from 8255.65 in on track to 100% projection of 8255.65 to 13460.5 from 11450.08 at 16654.89.

10-year yield to settle in range after steep pull back

The sharp decline in US treasury yields was a major driver of risk rally and boosted stocks to record highs towards the end of the week. The break of 1.585 support should indicate medium term topping at 1.765 in 10-year yield. TNX should now but consolidating the whole up trend from 0.504, and it would take a while to completed.

First line of defense will be at 23.6% retracement of 0.504 to 1.765 at 1.467. Without any special development, we’d expect this support to hold to set the range. The next move will depend on the inflation outlook after the current spike ends. There is prospect of dropping further to 38.2% retracement at 1.283 if inflation drops more quickly then expected afterwards. Or, there is prospect of break through 1.765 high should inflation persists towards Q4.

Dollar index might break 91.30 support soon

It’s looking increasingly likely that Dollar index’s corrective rebound from 89.20 has completed at 93.43 already, after hitting 55 week EMA. Near term focus should turn back to 91.30 support. Firm break there will should extend the fall from 93.43 to retest 89.20 low. EUR/USD should finally take out 1.2 handle decisively to fuel the decline in DXY. For now, it’s a bit early to judge the prospect of resuming the down trend from 102.99. The price actions from 89.20 could turn out to be a sideway pattern with another rising leg.

Gold should have completed correction from 2075

Gold’s rally last week should also double confirm Dollar’s weakness. 1755.29 resistance was finally taken out with some conviction, completing a double bottom reversal pattern (1676.65, 1677.69). The development is also the first sign that whole correction from 2075.18 has completed with three waves down to 1676.65.

For now, near term outlook in Gold will remain bullish as long as 1723.53 support holds, in case of retreat. Next target is 38.2% retracement of 2075.18 to 1676.65 at 1828.88. Sustained break there will further affirm this bullish case, and target channel resistance (now at 1876) for confirmation.

EUR/USD Weekly Outlook

EUR/USD rose further to 1.1994 last week, but struggled to break through 1.1988 resistance decisively. Initial bias is neutral this week for some consolidations first. Further rally will remain in favor as long as 1.1876 support holds. Sustained trading above 1.1988 resistance will affirm our bullish view that correction from 1.2348 has completed at 1.1703. Further rally would then be seen to 1.2242/2348 resistance zone. However, break of 1.1876 support will turn bias back to the downside for 38.2% retracement of 1.0635 to 1.2348 at 1.1694 instead.

In the bigger picture, rise from 1.0635 is seen as the third leg of the pattern from 1.0339 (2017 low). Further rally could be seen to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). This will remain the favored case as long as 1.1602 support holds. However, sustained break of 1.1602 will argue that whole rise from 1.10635 has completed. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289.

In the long term picture, the case of long term bullish reversal continues to build up, with bullish convergence condition in monthly MACD, sustained trading above 55 month EMA and long trend falling trend line. Focus is now on 1.2555 cluster resistance (38.2% retracement of 1.6039 to 1.0339 at 1.2516 ). Decisive break there will confirm and target 61.8% retracement at 1.3862 and above.