VIX surges, Wall Street extends losses, ASX futures tumble

The volatility index (VIX) has surged to a 12-week high and on track for its worst week in a year and Wall Street indices were broadly lower as investor anxiety sets in. With US data rolling over at a fast enough pace to warrant multiple Fed cuts, were finally at the point where stock traders see bad data as bad news for the first time in a long while. Political uncertainty surrounding Joe Biden (will he really run?) and the prospects of another turbulent Trump Presidency on the rise are also adding to the mix.

The Japanese yen was the weakest FX major on Thursday, as JPY weakened across the board as part of a corrective move against Wednesday’s surge. The retracements were relatively low compared with Wednesday’s strength, but allowed AUD/JPY to rise in line with my near-term bullish bias yesterday.

Australia’s unemployment rate rose to a 2-year high of 4.1%, yet it was a solid report none the less with the 50.2k jobs added being more than twice the 19.9k estimated, with both full and part time jobs increasing. The participation and employment-to-population rate also increased while the underemployment rate was lower. I do not see this as a reason for the RBA to change rates, and Westpac see it as a sign of a ‘soft landing’ with job growth average slowing overall.

The ECB held interest rates as widely expected and will continue with data dependence, meaning they’re making their decisions on a meeting-by-meeting basis. That leaves the potential for a September cut on the table, although it seems finely balanced as to whether they will.

• The Nasdaq is now flat for the month and on track for its worst week in three months
• The S&P 500 is forming a bearish engulfing week from tis record high and on track to print its first bearish candle in seven weeks
• The Dow Jones snapped a six-day winning streak at its record high (the prior three of which were all record highs)
• The VIX is amid its most volatile week in three months

VIX, S&P 500, Nasdaq 100, Dow Jones technical analysis:

We know that volatility oscillates and that the VIX is rising. The question now is how much further it can rise, as in doing so assumes further losses on Wall Street. And for that, I see a mixed picture. The VIX could rise another 4 points and head for 20 and still not take out the high set in April, but on the other hand such surges rarely last that long. And while the three major Wall Street indices are clearly on the ropes, they are in different phases of the same mini cycle: The S&P 500 topped six days ago and Thursday’s lower wick shows an early attempt for bulls to reclaim some ground, even if only temporarily. The Nasdaq 100 managed to recover and close back above its 20-day EMA, whereas the Dow Jone formed its first bearish candle in seven days, and a bearish outside day no less. The Dow also remains elevated above its moving averages, so further mean reversion towards the 10-day EMA (40,218) could be due.

ASX 200 futures (SPI 200) technical analysis:

The losses on Wall Street on Thursday translated as a -1.1% fall on ASX futures overnight. It is not unreasonable to expect a second round of selling for the ASX today when the cash market open. However, the futures market is sat on around a support cluster, so there is also chance of a bounce before further losses unfold, even if only small.

The daily chart shows an elongated bearish candle, although a lower wick saw the market recover back above the 10-day EMA, May high and 38.2% Fibonacci level. Perhaps a cheeky bit of mean reversion towards the April high could be due.

The 1-hour chart shows the overnight low held just above the 7900 handle, and RSI (14) reached oversold and a small bullish divergence formed on RSI (2) within the oversold level before breaking back above 50 to show positive momentum.

Given the strength of bearish momentum on the 1-hour chart, the preference could be to fade into rallies towards the April high with a stop well above, in anticipation of a move to 7870 near the high-volume node (HVN). A break beneath which brings the 78330 high into focus.

Events in focus (AEDT):

• 09:30 – JP Tokyo CPI
• 09:45 – FOMC Bowman speaks
• 13:00 – NZ credit card spending
• 16:00 – UK retail sales
• 00:40 – FOMC Williams speaks
• 02:45 – FOMC Bostic speaks
• Saturday: Fed media blackout period begins ahead of their next meeting

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge