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October, the bear killer month, has got off to a flying start with all the bourses and most commodities rising strongly on Monday. Europe led the way with the DAX, CAC and FTSE all up around 3%. The Volatility index (VIX) went under 20 for the first time in weeks losing nearly 8 percent, while oil and gold prices jumped by more than 2%. The Dow and S&P500 pushed up by close to 2%, with both indices now nearing a key reversal on the charts. The payrolls data on Friday has seemingly put aside the argument for a rate rise at the next FOMC meeting to be held toward the end of the month.
The S&P500 has rallied from the August/September support level of around 1880/1900 and is now testing the upper end of the range at 2000 (see below). For a key reversal (and for the correction to terminate) we need to see the index push above this level of resistance at 2000. Although this technical price action may take a few weeks more to play out, I am confident that the correction in global equity markets is nearing an end.
Market sentiment was positive in Asia also on Monday, with the Nikkei back above 18,000 after printing a 1.58% increase. China was closed for a holiday. The ASX 200 rose by 1.95% (with Sydney closed for a public holiday) to 5,150 as commodity prices strengthened. Copper jumped by 1.46% to US$2.36 per pound. The energy markets also rallied with Brent crude up 2.56% to over US$49 a barrel and WTI Crude was up by 1.93% to over US$46 a barrel. The commodity trader and miner Glencore rallied by 21% to close at 115p in London.
The VIX has broken below 20 once again and is now back testing support at 19.80. The previous rally in the VIX failed at 24 and it now looks increasingly probable that support at 19.80 will give way and the index will fall back into the 16/18 range. Under this scenario, global equity indices could advance in the months ahead after undergoing staging technical reversals.
Gold is on the move again after the probability of a rate hike in October diminished following Friday’s payrolls number which placed the US dollar under pressure. On a one year chart, the gold price has bounced off key support but must now break above $1140 an ounce to then set the stage up for the real test on the longer term.
Gold has been in a bear market correction since peaking five years ago at $1800 an ounce. Since then, prices have corrected by around 30% (which is mild compared to most other commodities). Downward momentum has dissipated as the gold price has converged within a bullish descending wedge formation. I think the most probable scenario in the months ahead is for the gold price to break above $1200 (this is now the key the resistance level at the top end of the range), which would signify the onset of a new bull market.
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