What’s coming after the rate cuts? - An abyss? or a bullish context?
As presented in previous editions, probabilities after breadth signals and historical studies about rate cuts periods suggest new all time highs are coming, and technicals presented last week like Volume Shelves and the McClellan Oscillator suggested that a bounce was around the corner.
$S&P 500(.SPX)$ and $NASDAQ 100(NDX)$ bounced from a higher level than expected, $DJIA(.DJI)$ and Small Caps $iShares Russell 2000 ETF(IWM)$ were the ones reaching the first weekly support and they bounced rapidly on Wednesday. Technical analysis is about probabilities and the S/R Levels are the rapid validators, so once $5,478 and $18,753 were conquered for SPX and NDX respectively (levels provided in advance on Fridays), the indexes soared.
Tech closed last week on the edge of a cliff, and as mentioned, that sector and most of the Mag 7 were suggesting a bounce was in play, that’s why the central weekly level was mentioned in the context of every chart. Once that level was consolidated on Wednesday, long entries could have been considered based on each one’s investment style.
The financial sector was presented two weeks as a warning for a pullback, it happened, the considerations about what’s next are updated today.
Bitcoin is moving from annual S/R level to the other, those lines have been published since March in this publication, back then they looked like one more line as many traders devise, today they look like the staff where a symphony is written; that is why my approach draws lines in advance, not in retrospective.
JPY & NDX
The Japanese currency has presented an inverse correlation with Nasdaq, and it makes sense considering the carry trade. What is interesting today is that the inverse moves are temporarily divorced, last week the JPY moved up like NDX.
This is definitely something to watch carefully as a macro indicator, even more considering that the BOJ is anticipating rate hikes that could generate a domino effect when borrowing Yens to invest in the US Market is not as cheap as before.
See the inverse position in oscillators and Bollinger bands, today both are pointing in the same direction, who is telling the truth?
CARRY TRADE
The carry trade is a popular investment strategy where investors borrow funds in a low-interest rate currency (like the Japanese yen) and invest them in a higher-yielding currency or asset. The difference in interest rates is the profit potential.
Here's how a rate hike in Japan would affect this strategy:
Increased Borrowing Costs: When Japan raises interest rates, the cost of borrowing yen increases. This reduces the profit margin for the carry trade.
Strengthening Yen: Higher interest rates in Japan can attract more foreign investors, leading to a stronger yen. This can reduce the value of the other currency or asset in the carry trade, potentially eroding profits or even leading to losses.
Forced Liquidations: As the yen strengthens, investors may be forced to unwind their carry trade positions to repay their loans before the value of their investments declines further. This can lead to a sell-off in the higher-yielding assets, causing market volatility.
U.S. MACRO NOTES: 25 or 50 BPS?
Inflation data from the past week revealed a significant easing of price pressures since their peak in 2021-2022. As the Federal Reserve prepares for its two-day policy meeting on Tuesday, they are closer to their goal of achieving low inflation. However, the extent to which they will lower interest rates remains uncertain.
While these readings pave the way for an interest rate cut at the Federal Open Market Committee meeting, the degree of aggressiveness remains a question. Financial markets, often a barometer of the Fed's direction, have been inconclusive.
For much of the past week, futures markets were leaning towards a quarter-point interest rate cut. However, on Friday, sentiment shifted towards an almost equal likelihood of either a 25 or 50 basis point reduction, according to the CME Group's FedWatch tool.
https://smartreversals.substack.com/p/the-expected-bounce-happened-whats?utm_source=profile&utm_medium=reader2
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