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We should sell Brent and S&P500

The forecast for the week 18 – 22 of July:


Investors are buying gold on pullbacks, but the mixed fundamental background does not allow to determine the only direction for this trading week. On the one hand, this week we can expect a decrease of the "risk appetite" against sluggish corporate reports from the United States as well as deterioration on the market of black gold. In this regard, gold may be supported as a safe asset. On the other hand, US dollar is strengthening on positive statistics, and this factor is already negative for the yellow metal as its price is denominated in US currency. So, this week we can expect flat 1315 -1375.


Current levels should be used for Sell position for two reasons. Firstly, growth of oil production in the USA will affect the price of black gold. On Wednesday, US Department of Energy reported an increase of production volume by 57 barrels per day - up to 8.485 million barrels per day. On July 15 the oilfield service company Baker Hughes again reported an increase in the number of oil drilling in the United States and Canada by 6 and 7 units, respectively. Thus, over the past two weeks the number of drilling rigs in these countries increased by 16 units and 9, respectively. Reports by Baker Hughes is a leading indicator showing that by the end of the summer we can expect a gradual increase in the volume of oil production. The driving season in the USA is now in full swing, but for the first six weeks of summer, gasoline reserves rose by 1.47 million barrels. During the same period of the last year, a 2.28 million barrels decrease was recorded. According to Bloomberg, during this period five tankers with gasoline had arrived to New York, which had to go back, because the ground storage facilities are filled to the max, and gasoline is even stored at sea tankers. At the beginning of the year, US refineries sharply increased production of gasoline and as a result, volume of supply has far exceeded the demand. Thus, we have to deal with the imbalance of supply and demand again – the vital topic in 2014-2015 forgotten in the first half of 2016. Secondly, growth of USDF quotations will put the oil price under a downward pressure, as commodity is denominated in the US currency. This week we should open Sell position on growth of quotations to ​​48.20/49.50 and take profit at 45.50.


The last three weeks, US stock market has been showing a positive dynamics, but this week there are two reasons, why we can see a drop quotations. Firstly, positive US statistics published the last week boosted growth of yield of treasuries. The yield of 10-years' bonds jumped by 0.19% up to the highest point over the past three weeks, which is a negative factor for the stock market. The stock market has a inverse correlation with yield of the bond market. Stocks and bonds compete for funds from investors and recent growth of yield contributes to outflow of capital from shares. Secondly, reports by the leading US banks for the second quarter make us anticipate a decrease of quarterly corporate earnings again. The net profit of Citygroup dropped by 17.45% y, Wells Fargo - by 2.78% y and J.P. Morgan Chase – by 1.43% y. Recession of US corporate profits on an annualized basis has been observed for four quarters in a row and this trend seems to remain in effect. Thus, we see the net profit dropping, whereas the stock prices are reaching new Highs. Open long positions during this period is very dangerous: at least a technical correction is overdue, either a market reversal is coming. This week we should open Sell position on growth of quotations to 2166/2180 and take profit at 2110.

Alexander Goryachev
Analyst of «FreshForex» company
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