As reported earlier, it has been a good day for European stocks, most notably the German DAX Index. However, shares on Wall Street have not been so buoyant despite a very good earnings season so far. Sentiment has been boosted after U.S. President Donald Trump decided to extend the deadline on deciding whether to impose tariffs on European Union exports of steel and aluminum and this helped to reduce the threat of a trade war for now. On top of this, the sharp rally in the U.S. dollar has weighed heavily on the Euro/U.S. dollar (EUR/USD) currency pair.
Major U.S. benchmarks posted a strong overnight session gaining about 0.5% across the board. The S&P 500 held major three-star support and finished Monday about 0.5% from its low. While the geopolitical front has remained calm, the market has benefited from slight relief in Treasury yields, a solid showing from Alphabet’s earnings and the wheels turning in Washington.
Stocks turned sharply lower in the last 12 hours based on 10-year U.S. T-Notes and the correlation with the E-mini S&P 500. Key for that move down was a breakout of an ending diagonal seen on the 10-year, which was a confirmation for a turn into a risk-off mode for stocks.
The S&P 500 and its daily time frame, where we see an incomplete higher degree impulse that is in progress since January of 2016. In the German DAX, where we also see price to be unfolding a bigger, bullish impulse (the DAX and the S&P 500 trade in positive correlations).
Volatility soared in equity and fixed income markets in the final hours of yesterday’s U.S. trading session. After dropping to 17, the Cboe Volatility Index gained 19%, ending the day above 20. The S&P 500 reversed a gain of 1% to end the day 0.55% lower. Similarly, the Dow Jones gave up 470 points from peak-to-trough, while U.S. Treasury yields spiked across the curve, and 10-year yields breached 2.95% for the first time in four years.
Looking at the monthly chart, we see price trading clearly in a five-wave recovery, from 2008 lows, when a bigger correction had ended. Now Elliot Wave teaches us that after five unfolded waves, a new three-wave setback can occur. In our case, this could transpire, however, we still believe a minor five-wave rally is still in the making within the final leg of this bullish cycle.