foxex: Cautious Optimism

Chart Advisor | Focus on the Price

Monday, July 29, 2019

1. Apple Rises Near Resistance Ahead of Earnings

2. Sterling Pounded on 'No-Deal' Brexit Risk

3. Gold Poised to Extend Gains

Market Moves

Stocks were mixed and mildly pressured overall on Monday, two days ahead of the Federal Reserve's highly anticipated interest rate decision that's slated for Wednesday. For now, markets are in a holding pattern and taking a wait-and-see approach, but investor sentiment remains cautiously optimistic ahead of what's expected to be the first rate cut by the Fed in more than a decade.

Aside from Fed expectations, of course, other major events and conditions will also likely have market-moving potential. For one, a two-day U.S.-China trade meeting is expected to begin on Tuesday in Shanghai. By now, though, markets have been somewhat desensitized to the on-again, off-again negotiations, and there are no high hopes for an immediate resolution. That said, if there is any quick progress during this week's talks, it should be constructive for stocks.

Then, of course, we have earnings, which is still in full swing. Though there will be a deluge of major earnings releases this week, the most heavily anticipated one will likely be Apple Inc. (AAPL), which reports on Tuesday after the market close. Consensus earnings estimates for the most recent quarter hover around $2.10 per share, which would be around a 10% decline from the same quarter a year ago.

Lowered earnings expectations due to the presumed effects of trade conflicts and tariffs along with slowing global economic growth have been common this earnings season. This may be contributing to more earnings beats than might otherwise be expected. If Apple can eke out an earnings beat this time around, its shares will likely extend the current bullish run.

As shown on the chart, AAPL stock has been in a sharp recovery since early June after it bounced from around the key 170.00 support area. Since then, price has shot back up above both its 50-day and 200-day moving averages. Ahead of Wednesday's earnings release, the stock is coming close to approaching the key 215.00 resistance area to the upside. On any further rally, a breakout above that resistance could then target a re-test of the 233.00-area record highs. To the downside, key support is around the 195.00 level.

Sterling Pounded on 'No-Deal' Brexit Risk

The British pound plunged further against the U.S. dollar on Monday, hitting a new 28-month low, as fears of a 'no-deal' Brexit intensified. Britain's new Prime Minister Boris Johnson, who will likely call an early election in the attempt to cement his position, has warned the country to prepare for leaving the European Union without a deal in place.

Johnson has called his predecessor Theresa May's Brexit deal "dead," and has said that a better one could be struck. But Johnson and EU leaders have not been willing or able to come to terms on a renegotiation. With Boris Johnson now heading the U.K. side of the debate, a no-deal Brexit, which could be both politically and economically disastrous for the U.K., seems increasingly likely.

As shown on the GBP/USD chart, the pound had a sharp negative reaction to the rising prospect of a no-deal Brexit. The currency pair had been sliding since mid-March, but broke down below the key 1.2500 level only this month. On Monday, the pound's drop was particularly severe, and it hit a new low against the dollar that hasn't been seen since March 2017. News for the pound is likely to get worse before it potentially gets better, and GBP/USD has plenty of room to the downside. For now, the next major downside target if sterling continues to get pounded is around the key 1.2000 psychological support level.

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Gold Poised to Extend Gains

We've talked about the potential for higher gold prices before, and this potential continues to be in play as the Fed considers lower interest rates going forward. Also, global economic and political risks are likely to make gold an even more attractive investment for risk-averse investors. When interest rates are expected to fall, non-interest-bearing gold has less competition from interest-bearing instruments. As a result, demand for gold, and gold prices, tend to rise. This is what we've recently seen with the precious metal as the Fed has become increasingly dovish in the past few months.

Now, gold is in consolidation not far off its new six-year high that was just hit little more than a week ago. Price is currently consolidating in a rough pennant pattern, which is usually considered a trend continuation formation. If the Fed starts and stays on a rate-cutting path, gold prices could be boosted further after a potential upside pattern breakout.

The Bottom Line

Yes, it's pretty much all about the Fed this week, but major corporate earnings (most notably Apple) and U.S.-China trade talks should also deliver a significant impact. For stocks, there's an air of cautious optimism on the part of investors. If the market gets at least what it's overwhelmingly expecting from the Fed – a 0.25% rate cut with some dovish language to set the stage for future rate cuts – we'll potentially be seeing significantly more upside for stock indexes into new record high territory.

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