Stocks On Losing Streak, Gold Strong, Chart Analysis

On Thursday, the rollercoaster ride of U.S. stocks showcased the battle between a robust economy and the Federal Reserve's cautious stance, leaving investors on edge.

Uncertainties in the Middle East continued, treasury yields rose, and gold gained traction. There is no denying now that gold has been rising as a safe haven asset and is not as reliant on rate cuts as the stock market is. In fact, the potential delay in cuts may be some of what's fuelling golds strength.

New York Fed President John Williams highlighted the economy's strength and voiced his scepticism about the need to slash interest rates now. Fed Chair Jerome Powell, as usual, did his best to avoid giving any hints about the timing of potential rate cuts during his recent statement.

Powell and William's defence relied on mixed data on Thursday, including positive jobless claims and factory data with weaker home sales figures. But what is happening with stocks? The S&P500 looks like it is about to close a 5-day losing streak and mark the biggest fall since last October. Throughout the last trading session, the three major U.S. stock indices swayed, with the Nasdaq finally experiencing weakness in the chip sector.

U.S. 500 1D Chart


In Europe, stocks ended higher from positive earnings reports, but they are still haunted by geopolitical issues (which they are geographically much closer to) and ECB speakers disagreeing about if they are just copying the Fed or not.

At home the ASX200 is now down 3% this month, not immune to the broader global trend.

World oil prices fluctuated amid U.S. sanctions on Venezuela and Iran, alongside robust economic indicators, tempered by concerns about demand and tensions in the Middle East.


How far might stocks fall?

One trick some analysts keep up their sleeves is measuring resistance levels on the U.S. Dollar index. This can show key historical ranges for U.S. Dollar strength and give clues about may be coming.

U.S. Dollar Index 1W Chart


We can see that the U.S. Dollar has recently gained strength against other currencies and the index has made a breakout upward. This strength is historically correlated with weak activity in risk markets (stocks). Purely observing resistance levels on the Dollar Index shows that its strength has caused a breakout to the upside and there could be implied further trouble for stocks. One scenario based on the above levels could call for a further rise in USD strength, followed by a rejection. Another could be an aggressive breakout to more historical highs, which would be a major warning sign for stocks. We may see the deciding candlestick form in the next week.

Despite that possible USD strength, we remind you of how gold almost always outperforms at times of major sharemarket corrections.