Oil, Nestle, Italy Leads Global Rally

Summary

Event 1: Global Stocks Near All-Time High

Causes: 1.       Oil’s third-day climb caused a rally in energy stocks

           2.        Nestle, Europe’s biggest company, led a European rally

           3.        Italy saved two failed banks, causing an Italian rally

Event 2: The pound advanced

Cause: PM May agreed a deal with Northern Ireland’s Democratic Unionist Party to supper her minority government in key votes in the UK Parliament.

Brief

Event 1: Global Stocks Near All-Time High

Causes: 1. Oil’s third-day climb revives investors’ hope, who bought energy stocks

Background:        Last week oil fell almost 6% leading equities in a selloff.

1.      energy stocks were sold off

2.      energy stocks dragged down the averages

3.      scared investors sold general stocks

4.      oil’s influence on the prices of products and services in an industrial economy will drag down inflation, which will slow down the Fed’s rate hikes, which will slow the economic growth

Trade 1: Short oil – rally is a correction within a downtrend - See Trading Strategies

2. Nestle, Europe’s biggest company, led investors to also buy other European stocks

·        It became public that NY hedge fund Third Point accumulated a $3.5 billion position in Nestle.

Trade 2: Likely to rise midterm– rally completed 2 continuation patterns – See Trading Strategies

3. Italy saved two failed banks, causing an Italian rally

·        Italy was forced to bail out two more banks for 5.2 billion Euros in a banking crisis – Banca Popolare di Vicenza and Veneto Banca – to avert an Italian version of the 2008 financial crisis

·        Hopeful the Italian economy will be saved, Investors felt confident again to buy Italian equity.

Trade: 3 FTSE Italia All Share Banks likely to decline in short-term -  momentum slowing down -See Trading Strategies

 

 Event 2: The pound advanced

Cause: PM May agreed a deal with Northern Ireland’s Democratic Unionist Party to supper her minority government in key votes in the UK Parliament.

Background:        The pound has been declining since PM Theresa May lost power in the recent UK election, which weakened her hand in negotiating with the EU over its post Brexit trade deal.

The deal returns some of her power, and the pound, whose fate has been tied with May’s political fortunes since her appointment in 2016, rose accordingly. Technically, it reached its uptrend line since the October flash crash.

 

Trade: 4 Pound likely to rise in midterm – Price bounce confirmed uptrend line since October, suggesting uptrend intact – See Trading Strategies

 

Markets Movers

Markets may potentially react this week to heads of key central makes – including European Central Bank President Mario Draghi, Federal Reserve Bank Chair Janet Yellen and Bank of Japan Governor Haruhiko Kuroda -–who make public appearances this week. However, analysts don’t expect a deviation of central bank policy paths, despite the oil crash. Nevertheless, when heads of central banks speak, investors listen to things said, unsaid and imagined, and they finger is light on the trigger, causing at times sharp short term movements, each with a potential to turn out to be a long-term movement.

Another potential market mover is economic data, with key reports on inflation, employment, manufacturing and housing from China to the US.

Upcoming Events

• U.S. spending data may reveal consumers are only moderately rebounding and the inflation backslide is continuing.
• The U.S. Energy Information Administration holds its 2017 energy conference this week.
• President Donald Trump will host India’s Prime Minister Narendra Modi and South Korean President Moon Jae-in.
• The Bank of England’s Financial Policy Committee releases its stability report on Tuesday and Governor Mark Carney holds a press conference.
• The Federal Reserve is set to announce the results of the second part of its annual U.S. bank stress test on Wednesday.
• China’s PMI might have declined in June after unexpectedly remaining unchanged in May, reflecting government offers to cut overcapacity and leverage.
• Also due this week: Japanese inflation, factory output, unemployment, household consumption and housing starts; rate decisions in Colombia, the Czech Republic and Armenia.

Trading Strategies

Trade 1: Short oil – rally is a correction within a downtrend

Crude Oil WTI Futures Daily Chart

Oil officially entered a bear market last week, after it fell 20 percent since its January $45 high. After a third-straight-day rally, it crossed the downtrend line since May 25, but was forced back below, forming a bearish Shooting Star, which only confirmed the significance of the downtrend line.

The major moving averages: 50 (yellow), 100 (orange) and 200 (red) executed a double bearish Dead Cross, as the 100 crossed below the 200, after the 50 already crossed below the 200 as well, demonstrating the more recent price average, on two levels, is lower than the previous price averages. This suggests a bearish momentum and that prices will continue to decline.

Trading Strategies

Traders are likely to short oil, while placing a stop loss above the $43.64 high of the day.

Minimum Price Objective: $42

 

Trade 2: Nestle likely to rise midterm–completed 2 continuation patterns

Nestle SA, Switzerland, Daily Chart

Minimum Target Price: 4.5 CHF per share toward 90.00, or 5%.

Supply-Demand Analysis

·        Completed consolidation continuation pattern, which means that the current investors are “fresh,” having come in now, as opposed to “tired” investors, who’ve been waiting to cash out and sell.

·        Created bullish Breakaway gap, which suggests momentum is a repeat move on the upside.

Trading Strategies

Minimum Target Price: $89, and since we’re carving out new price territories, there are no resistances.

Conservative traders would wait on a long position for a correction, as both gaps and H&S patterns often have one. Although it is a highly contested myth whether gaps must fill, they generally do, at least in part, as a gap is by definition an emotional expression. Traders experience buyers’ remorse, as they are concerned they went too far, and immediately take profit, tipping the supply side of the scale. Since a rising gap’s support is at its bottom, Nestle’s would be at yesterday’s high price of 82.30.

Moderate traders would to buy wait for a correction on a return move to the H&S, which is at 84.

Aggressive traders would jump in with a stake now, as there might be no return move, and they will have missed a reliable opportunity. However, they should be aware that their certainty of being in the position is offset by a proportionate elevated risk of a pullback and input that into their capital management.

Trade: 3 FTSE Italia All Share Banks likely to decline in short-term - momentum slowing down -

FTSE Italia All Share Banks, Italy, 60, Milan

Sentiment Analysis

Often, after emotional buying, investors experience buyers’ remorse. They get scared that the stock moved too much too far and rush to sell it, before others reach the same conclusion. This causes a take-profit correction.

Supply-Demand Analysis

The price reached a resistance price level, which was created by the peak of April and later by the troughs during most of May. It confirmed this resistance today by stopping and also creating a bearish Shooting Star, which demonstrates that after the bulls showed their hand and pushed prices up, the bears had the last say and pushed it back down. The price right now is right at the resistance, providing an exceptionally attractive risk-reward ratio.

The MACD indicator, which shows the relationship of price averages between different periods is slowing down, and the RSI, a momentum oscillator that measures the speed and change of price movements, is the most oversold since May 8 and turning.

Trading Strategies

A short with a stop loss above 11028 provides an exceptional risk-reward ratio, with the price target of 10600

Trade: 4 Pound likely to rise in midterm – Price bounce confirmed uptrend line since October, suggesting uptrend intact

GBPUSD Daily Chart

The pound neared its uptrend line since the October flash crash in Asian trading, and bounced up, now for the fourth straight day.

The RSI just completed a double bottom reversal, suggesting momentum has more impetus on the upside.

Trading Strategies

Conservative traders would probably wait for a correction back toward the 1.2600 price level, where the price support will probably meet with the uptrend line, while aggressive traders may rely upon the leading RSI momentum indicator upon having completed a double bottom reversal and jump in now.

Target Prices: 1.2800 and 1.3000