After a brighter start to the new week, it was more of the same since the European markets opened. US index futures have turned negative, along with European indices as investors continue to shun risk. Indeed, it is not just stocks that are taking a hammering. Cryptos, commodity dollars and emerging market currencies were also sharply lower.
The key question is this: will the sentiment turn positive any time soon? It is impossible to say, but we do have the Fed meeting this week and there is a chance Jay Powell may talk down the prospects of aggressive tightening. What’s more, the upcoming tech earnings could lift the mood after what has so far been a weak start to the reporting season. Additionally, the spread of omicron in Europe appears to be slowing and governments have reduced travel restrictions, while workers in the UK have been encouraged to go back to the office. So, we may see some improvement in the economy in the months ahead.
But for now, the trend is clearly negative. The loss of appetite for risk comes on the back of overindulgence last year. This year, investors have realised that the era of zero-interest rate policy is coming to an end faster because inflation is soaring. On Wednesday, the Fed is widely expected to provide the clearest signal yet that the first rate hike since 2018 will be coming our way in March.
What’s more, tensions around Ukraine and a relatively poor start to the US fourth quarter reporting season have not helped sentiment whatsoever. It is unquestionable that the sell-off has been turbo-charged because of technical selling as more and more support levels have broken down in popular stocks or indices.
Speaking of which, the Nasdaq has just broken below yet another support: the October 2021 low of 14380ish ahead of earnings from Microsoft, Tesla and Apple:
NasdaqSource: ThinkMarkets and TradingView.com
With the Relative Strength Index at oversold levels of sub 30, I wouldn’t be surprised to see some “bargain hunting,” possibly as early as today or this week.
If we do see the indices such as the DAX and Nasdaq come back strongly here, I would like to see the formation of a strong hammer candle such as the one I have drawn on the chart.
