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Week Ahead: Risk Appetite Returns But Volatility Remains; Gold, Oil Could Drop

Published 03/20/2022, 07:03 AM
Updated 09/02/2020, 02:05 AM
  • Volatility continues
  • Risk-on returns (for now)
  • Light economic calendar populated by policymaker speeches

We anticipate another volatile week, as investor sentiment fluctuates between satisfaction on the Federal Reserve's so-far mild tightening, in order not to upend the US economy versus worries that to curb still-escalating inflation, the central bank may have to adopt a more hawkish stance than it had originally anticipated.

As well, expect Russia's ongoing invasion of Ukraine to remain the focus of headlines, though traders are likely to also begin paying more attention to the growing COVID contagion in Europe along with virus-related shutdowns of Chinese cities.

Trading Week Ends Strong As Fed's Rate Path Clarified...But Is It?

After investors believed they'd gained clarity on the central bank's outlook for monetary policy following Chair Jerome Powell's remarks Wednesday on the Fed's path to higher interest rates subsequent to the first rate hike since 2018, stocks surged, finishing the week with a strong tech rally as well.

The Dow Jones Industrial Average and the Russell 2000—the two major US indices representing value shares—lagged, each gaining about 5.5% for the week.

The S&P 500 Index jumped 6.23% on a weekly basis.

SPX Weekly

The broad benchmark vaulted back above the neckline of an H&S top. If the SPX keeps rising, it could blow out what would have been a top, turning it instead into a continuation pattern heading higher.

The past week's outperforming sector: Consumer Discretionary, a segment whose stocks do well when consumers are confident about their jobs and salaries. Consumer discretionary shares outperformed, soaring 9.09% for the week.

However, the most significant influencer among stocks on the S&P 500 was the Technology sector which leaped 7.64% over the same period. As a result, the tech-heavy NASDAQ 100 outperformed—leading peer indices as it added 8.46% of value for the week. And, since higher interest rates will enhance bank profits, Financials also finished the week significantly higher, +7.14%.

Energy was the only sector to close the week in the red, down 3.6%, tracking retreating oil prices lower.

During the coming week, starting with Chair Powell's appearance at an economics conference on Monday, planned speeches by more than a dozen Fed members will allow for fine-tuning of the overall central bank message. The Fed boss will also participate in an international banking conference on Wednesday.

Some analysts insist that, since the first rate hike is behind us, the worst is over and investors will continue driving up stocks for a second strong week. However, from experience, we also know that the market narrative can be inconsistent, not to mention investor sentiment which can be surprisingly fragile, meaning risk on appetites and could just as quickly turn timid.

We've been surprised at how easily investors "bought into" Powell's policy pivot after his repeated promises that inflation was transitory. We don't necessarily say this as a direct criticism aimed at Powell. It's his job, after all, to strive for stable prices. And part of that is being the economy's cheerleader. However, it's our job to remind readers that he's flip-flopped on Fed policy before.

It's also our job to note that traders can be mercurial, sometimes hearing only what they want to hear. Indeed, they've so far ignored Fed members whose remarks didn't necessarily meet the market's approval. Case in point: St. Louis Fed President James Bullard and Fed Governor Christopher Waller both said on CNBC that they want to raise interest rates faster than the median seven hikes the Fed expects for this year, but markets still finished the week on a buoyant note.

At the same time, the war in Eastern Europe grinds on, with no sign of an end. Along with fatalities, it's also causing economic disruption, by hampering global commodity supply, another hazard showing no signs of slowing down.

Should the situation persist—both lack of necessary commodities and the resulting price run-up on whatever is available—the Fed could be forced to raise rates more quickly than originally intended. Worse, the central bank will end up chasing inflation rather than getting out ahead of it, causing a more significant price ramp up.

Yields on the benchmark 10-year Treasury jumped past 2.1%, to the highest point since May 2019. Investors are selling off long-dated bonds in favor of newer bonds providing higher payouts, as interest rates are heading higher.

UST 10Y Daily

Rates completed a weekly H&S bottom, creating the momentum for yields to test the November 2018 highs of over 3%. Treasury yields are a leading indicator for Fed funds futures rates.

The dollar dropped for the week, ending a three-week winning streak for the greenback.

Dollar Weekly

The USD could keep falling toward the bottom of its rising channel, and the neckline of the H&S continuation pattern, which might prove to be support for the global reserve currency for a second consecutive week. That would raise the odds of a continued uptrend.

Despite the weakening dollar, gold sold off.

Gold Weekly

After reaching our target bulls are taking profit on the yellow metal even while investors have been increasing their tolerance for risk. The precious metal completed a weekly Evening Star, indicating that gold will continue to fall, potentially retesting the massive triangle developed throughout 2021.

Gold Daily

On the daily chart, gold produced a Morning Star, in play from Tuesday through Thursday, suggesting the price may have simply completed a "return move," and the precious metal will actually climb.

In this case, we have more faith in the weekly rather than the daily chart. Still, the price could rise according to the Morning Star pattern on the daily chart, albeit temporarily, before turning down, as the weekly chart suggests to us.

Bitcoin pushed higher last week as investors sought out risk.

BTC/USD Weekly

We've been bearish on the cryptocurrency since early 2022. The token is developing a symmetrical triangle, more likely bearish after completing an H&S top, whose implied target would achieve an even larger double-top.

However, if the symmetrical triangle breaks to the topside, we can see Bitcoin returning to the top of the range, testing its November record under $69,000. Nevertheless, as long as the price remains within the symmetrical triangle, we'll continue to be bearish.

After a week of wild swings, crude oil returned to, and remained, above $100, but we expect this to be temporary.

Oil 4-Hour Chart

WTI found repeated resistance by the neckline of a 4-hour H&S top, suggesting a return move. Now, prices are more likely to return to declines. The pattern's implied target is as low as $80.

The Week Ahead

All times listed are EDT

Sunday

21:15: China – PBoC Loan Prime Rate: was previously set at 3.70%.

Monday

3:30: Eurozone – ECB President Lagarde Speaks

10:00: US – Fed Chair Powell Speaks

Tuesday

14:00: US – FOMC Member Daly Speaks

17:00: US – FOMC Member Mester Speaks

Wednesday

3:00: UK – CPI: seen to rise to 5.9% from 5.5%.

8:30: UK – Annual Budget Release

10:00: US – New Home Sales: expected to climb to 813K from 801K.

10:30: US – Crude Oil Inventories: last week's release showed a build of 4.345M.

Thursday

4:30: Switzerland – SNB Interest Rate Decision: forecast to remain steady at -0.75%.

4:30: Germany – Manufacturing PMI: forecast to slip to 56.0 from 58.4.

5:30: UK – Manufacturing PMI: probably declined to 57.0 from 58.0.

5:30: UK – Services PMI: seen to slump to 58.0 from 60.5.

8:30: US – Core Durable Goods Orders: forecast to edge lower, to 0.6% from 0.7%

8:30: US – Initial Jobless Claims: likely to have fallen to 211K from 214K.

Friday

3:00: UK – Retail Sales: expected to drop by more than half, to 0.8% from 1.9%.

5:00: Germany – Ifo Business Climate Index: expected to edge lower to 94.0 from 98.9.

10:00: US – Pending Home Sales: predicted to jump to 1.5% from -5.7%.

Latest comments

It would definitely a great wrong to blame Powell for inflation soaring to a 40 year high - the primary cause of inflation is the shocking failure of the Biden administration to deliver on taming oil prices - and instead causing food and metal prices to zoom by causing supply disruptions thru sanctions.
Crude is struggling to climb above $106 once it breaks 110,115 expected in a single day.
As I told Yesterday, crude breaks 110 and moves on towards 115
Wednesday's crude inventories will be lower then expected. Spring break weekend. I saw gas stations with no gas. I spent 260$ on gas over the weekend on my gas guzzling Escalade. How much did you spend? Good info, but WTI definitely broke out of that down channel 📉📈🐂
The days on the federal reserve put is dead. Let me repeat that federal reserve put is dead. There’s going to be aggressive rate hikes. And none of this is priced into the market. Including massive earnings revisions coming down which has not even been priced until the market by .0001%. 3500 on the S&P fair value. $225 a share times 16 X equals 3600. That’s year end 2022
Wrong. Oil to 130-150 a barrel. Buy energy steel materials. CVE GGB
Wow...how much more risk is there and Gold should be soaring given the volatility of war and inflation. Fortunately for Wall St they have the Comex on their side to suppress PMs and keep investors in overvalued stocks. The FED and the Central banks want you on the titanic when it sinks!
gold is going higher to 2500 next week month. buy fast, GULF and Pakistan buyers also Chinese insects
Bearish on crypto bullish on gold? Whst the hell are you smoking? Please deal in reality!
I guess …Oil n gold might bounce a bit this week as SPX/QQQ digestion is needed after huge spike!! Literally coming week..its all going to be choppy hurting both sides..imo
Or you could say oil has a cup and handle on the weekly too. You can make up any pattern you want. Oil will move up or down on news. Period
How are you doing today
it can't stay too optimistic too long
What do the chicken bones say?
Uptrend for sure, but there are pullbacks.
Gold and oil headed down?
 lol, oil trades on inflation - wow is that a stoopid thing to say - oil trades on Demand and geopolitics that could affect supply
what happen to supply and demand?
How are you doing today
The Article look great, Thanks 💯
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