May 2 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
The Dow Jones Index achieved its highest value since December 2007 as U.S. stocks rose dramatically yesterday. This development was a direct result of data released Tuesday morning showing that the U.S. manufacturing sector grew at a faster pace during April than most pundits expected. This result immediately induced the beneficial effect of suppressing the market’s apprehension concerning a potential slowdown in the US economic recovery. The Institute for Supply Management (ISM) report was one of the few bright instances of positive U.S. economic news released in recent weeks. Investors quickly adopted a more bullish stance following the better-than-expected ISM data to force the US major indices higher following a period of recent relative calm. In particular, the ISM advised that its index of manufacturing activity climbed to 54.8 in April from 53.4 in March. This result easily beat the market expectation of 53.0 and registered the strongest growth rate in 10 months.
During yesterday, the Dow surged to a four year high by peaking at 13,338.66 before retracting and closing at 13,279.32. However, in April the S&P 500 recorded its first monthly decline since last November as economic data posted during last month signaled both declining US economic growth and increasing difficulties concerning European debt contagion. On a brighter note, the present corporate earnings season has been impressive with over 71% of the 321 S&P 500 companies registering Q1 results surpassing their expectations. As yesterday was a bank holiday in most of Europe, traders began to adjust their focus away from the fundamental debt problems haunting Spain and Italy towards the major events later this week. Consequently, trading volatility is expected to remain subdued before the European Central Bank meeting on Thursday, the omnipresent U.S. non-farm payrolls report on Friday and weekend elections in France and Greece.
After the EURUSD achieved a four week high of $1.3277 early yesterday, it plunged by over 70 points immediately following the much better-than-expected U.S. manufacturing data. This data release indicated that the US factory performance had unpredictably lifted during April countering the effects of other poor economic postings recently registered. As the chart below illustrates, the EURUSD again toyed with breaking through its upper trendline before failing and then hitting a one-month low later in the day. This pair needs to penetrate above 1.3290 in order to achieve any bullish momentum. As the EURUSD is experiencing significant difficulty achieving this feat, a good opportunity to sell this pair will occur if price can break below 1.3205.
As the chart below shows, the GBPUSD has been strongly trading upwards in a bull channel since mid-January. In fact, last week the pair even managed to break above its upper trendline. The primary fundamental reason for this trading pattern is that the Bank of England has rejected any notion of further stimulus while in the USA this concept is still very much on the table. However, concerns about the new official British recession and better-than-expected ISM data released yesterday are now placing this bull trend under stress. This effect can be confirmed by noting the two rightmost bearish candlesticks on the chart below. Consequently, if the current trading pattern continues to disintegrate then a good opportunity to sell this pair will be if price can achieve a sustained break below 1.6170.
The Reserve Bank of Australia (RBA) caught investors by surprise yesterday when it cut its interest rate by 50 basis points as opposed to the expected 25 basis points. As the chart below demonstrates, the AUDUSD plunged as a result by about 1% during the course of yesterday’s trading which was the biggest movement recorded by any of the ‘majors’. The principal reason for this action is that the RBA is attempting to counter the negative effects emulating from European debt contagion and the Chinese economic slowdown. As the influences of this significant measure begin to take effect, the AUDUSD is very likely to suffer further extensive weakening. Consequently, a good opportunity to sell this pair will be if price can break below 1.0300.
The chart below illustrates that the USDCHF has been trading a converging channel since late February delineated by a sloping downward trendline and a sloping upward one. In recent days, the pair has managed to break below its lower trendline. However, this bearish movement could be limited as the Swiss National Bank has been recently making loud noises that it intends to curtail the strength of the Swissie which it regards as a major problem. In addition, yesterday’s release of the better-than-expected ISM data also provided support for the USD as shown by the rightmost candle on the chart. If these two effects continue to take root, then the USDCHF will surge in value. Consequently, a good opportunity to buy this pair will occur if price can achieve a sustain break back above 0.9105.
The table below shows yesterday’s performance of OptionRally’s Commodity Options. Gold dropped in value yesterday curtailing five-days of consequent gains as a direct result of the encouraging U.S. manufacturing data. This development effectively reduced the prospects of further U.S. quantitative easing which suppressed the investment charm of gold in its capacity as a safe-haven asset. This metal has now dropped about $125 in value since late February following a sequence of better-than-expected releases of US economic data and a very good corporate earnings season. In addition, as gold recorded a small decline during April this was the first occasion since 2000 that it has registered three consecutive monthly losses. However, with European debt difficulties and signs of global economic slowdown on the increase, many pundits still predict a significant rise in the value of gold in the short-term. Consequently, a good buying opportunity will arise if price can break above the recent high of $1663.80.
Platinum rose by 0.05% to finish the trading day at $1,576.00 per ounce although Silver crept downwards by 0.28% closing at $30.93 an ounce. The better-than-expected Chinese and U.S. economic data that was posted yesterday significantly improved the outlook for oil demand causing its value to surge by 1.29% to its closing value at $106.16 a barrel. If this trend continues today, then a good buying opportunity will occur if price can break above the recent high of $105.20 per barrel.
The table below shows yesterday’s performance of some of OptionRally’s main Stock Options. BP Plc reported a drop in its Q1 profits yesterday as a consequence of a production decline resulting from the sale of some of its oil fields in order to compensate the Gulf of Mexico disaster. As a result, of BP shares plunged 0.92% to close at $43.01. In contrast, Intel’s shares, which have been considered to be undervalued by many market analysts, achieved a year high at $29.05 before closing up 2% at $28.95. Many investors considered this development to be an indication that the technology sector is enjoying good support as the stock markets climb higher. Chesapeake, which is the number two natural gas company in the US, announced that it intended to replace Aubrey McClendon with an independent, non-executive chairman. In addition, this company stated that it plans to terminate McClendon minority stakes in Chesapeake’s wells.
Apple shares fell yesterday by 0.32% closing at $582.13. However, the market evaluation of this company is a strong BUY. Consequently, a good opportunity to open a CALL stock option with Apple as the underlying asset will be if price breaks above the recent high at $596.00.
Similarly Google shares also dropped moderately yesterday by 0.07% and finished the day at $604.43. This company is also evaluated by the market as a strong BUY. As such, a good opportunity to activate a CALL stock option with Google as the underlying asset will be if price can break above the recent high of $610.81.