Donald Trump will be inaugurated as the 45th US president just after the European close on Friday. The tone of his acceptance speech is likely to be broadly conciliatory in nature with a pledge to heal divisions and work for unity to benefit the whole of the US by boosting economic performance. A relatively conciliatory tone would tend to support risk conditions and underpin US equities in the very short term.
In congressional confirmation hearings, Trump’s Treasury Secretary nominee Mnuchin stated that he backs a strong dollar policy and that Trump had been misunderstood when he called the dollar too strong. He did, however, deviate from prepared text by introducing the strong dollar comments which increased speculation surrounding tensions over currency policy.
He stated that China would be called a currency manipulator if the practice resumed, appearing to contradict Trump’s promise that China would be called a manipulator on day one. The ambiguous comments did little to clarify the Administration’s likely currency and trade policies surrounding China and the global economy. Federal Reserve chair Janet Yellen also made fresh references to unsustainable budget deficits and economic concerns are liable to increase next week with equity-market gains liable to reverse.
The weekly chart highlights the ending wedge formation and with the 161.8% Fibonacci extension target sitting at 2,300 we remain cautious on further upside.
Daily charts also highlight some possible reversal patterns forming and this extended rally looks to be nearing its end.
A Diamond top formation would target a reversal to just below 2,220 and this could be the early stages of a head-and-shoulders reversal.
Bearish divergence on the daily chart is also evident and points to a move lower.
Management and risk description
We look to take partial profits in front of the diamond top measured move target (2,217), the previous support level and 50% Fibo retracement (2,180-83) and the cloud bottom and 61.8% Fibo retracement (2,160).
Entry: sell US500.i at current prices 2,271.
Stop: a break above the psychological and 161.8% fib extension level of 2,300.
Targets: 2,220, 2,183, and 2,160.
Time horizon: one to four weeks.
Daily chart showing bearish divergence:
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Source: Saxo Bank
Daily chart highlighting diamond top and potential head-and-shoulders formations:
Weekly chart indicating ending wedge formation:
— Edited by Michael McKenna
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