With Trade Talks Back On The Menu Indices Rise For The Occasion

Sentiment has been given an extra boost in Asia today, on reports that US and China are set to resume trade talks In October. Sentiment had already been lifted by stronger China Service PMI yesterday, along with news Hong Kong’s PM was to officially withdraw the extradition treaty. But it was today’s trade-war breakthrough which made a notable mark on asset prices.

What helps the report carry more weight is the phone call made to agree to the talks has been confirmed by both US and Chinese spokesman. This may seem like an obvious requirement, but it should be remembered that President Trump took some flak for claiming trade talks were going well, over a phone call China claim didn’t happen. But only after the markets had already rallied, before quickly reversing course once China denied the call.

So, with index futures trading higher and USD under pressure, markets may have hit an inflection point. At least over the near-term.

We flagged recently that the AAII sentiment indicator suggested a bearish extreme may have been reached for the S&P500.  Whilst the timing is never perfect, it can signify a major trough has been reached if the spread between bullish and bearish investors form the survey is historically low. Given that prices have been trading near the top of the range and today broken higher, we suspect we may have seen a significant low.   

Today, the S&P500 E-mini futures broke out of range, so we expect the underlying index to gap higher at the open. Since falling from 3029.50, a two-bar reversal pattern stalled above 2726.50 support to mark a higher low. And today’s breakout suggests it will push for the highs and perhaps further, given the likelihood of further Fed easing and the long-term uptrend.

• Bullish could look to buy dips above the original breakout level around 2,944
• A daily close above 2,961.25 would be constructive, given it’s a pivotal level
• A break below 2,944 suggests if a deeper correction (and spoils the near-term bullish bias) but the trend remains bullish above 2,800

The inverted head and shoulders on DAX is in play, after prices broke and have since remained above the neckline. In fact, we saw a nice retracement to the breakout level, followed by a couple of doji’s to show resistance turned into support, before gaping higher.

We previously mentioned the upper gap around 12,115 could make for an interim target. Although it’s possible prices may gap above this resistance level if sentiment is to carry over to the European session.

• For now, the H&S target around the 12,12,473 high remains in focus, and traders could look to buy dips on the intraday timeframe, seek continuation patterns or enter break of new cycle highs.
• Whereas a break back below 11,880 invalidates the head and shoulders pattern, and places DAX onto the backburner.

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