Market Overview
During times of elevated volatility driven by increased investor fear, markets will often tend to over-react somewhat. Falling sharply and almost precipitously on Friday amidst increase protectionist fears, a turnaround is now afoot.
Media reports that the US is in serious discussions with China over how to reduce its mammoth $375bn trade deficit, suggest that fears of a trade war may be overdone, at least to some extent.
Subsequently the fear driven move into safe haven assets is beginning to reverse, driving the yen lower and US Treasury yields higher (however, it is interesting to see the gold price holding up for now). It was the sharp sell-off on equity markets that made the headlines last week and the sell-off is now unwinding as sentiment has improved again. How this story of the US implementation of trade tariffs is likely to rumble on and markets will react.
The elevated volatility of the markets, with the VIX still above 20 means that markets could still take some time to settle down, but at least for now there is a sigh of relief that perhaps President Trump is not intent on plunging the world’s two most significant economies into a trade war.
Wall Street bounced hard last night with the Dow up almost 670 ticks and the S&P 500 +2.7% at 2658. Asian markets were equally positive with the Nikkei up +2.7% also benefitting from a weaker yen. European markets are strong in early moves, but as ever seem to take a more muted reaction.
In forex, there is a mixed look to the major pairs, but the yen weakness is the biggest standout. Equally though with euro and sterling positive, the dollar is struggling to reclaim lost ground.
In commodities, with the failure of the dollar to rebound in any real fashion this means that gold is holding up well so far and not seen any decisive profit taking yet, whilst the oil price is also supported.
It is a relatively quiet European morning for traders but there is more interest as the US comes on line. The S&P Case Shiller House Price Index is at 14:00 BST which is expected to show prices dropping back to 6.2% (from 6.3% last month).
The Conference Board’s Consumer Confidence is then at 15:00 BST and is expected to marginally improve to another multi-year high to 131.0 (130.8) with the last time the reading was this high being December 2000. The Richmond Fed’s Composite Index is at 15:00 GMT and is expected to drop back to +23 (from an extremely strong +28 last month).
Chart of the Day – EUR/GBP
Euro/Sterling has been one of the most boring range plays across the major crosses in recent months. The market has swung consistently between £0.9035 and a recent low of £0.8667. Momentum indicators have retained a very slight negative bias within that period, however are broadly reflective of a range, with the RSI failing consistently at 60 and then falling into the low 30s. Stochastics oscillate from overbought to oversold whilst the MACD lines are hovering benignly around neutral. With the market again swinging higher yesterday is this the beginning of another turn to see euro outperform sterling within the range? Perhaps so. Last Thursday’s long-legged doji came as the market once more re-affirmed the range with a rebound from £0.8667, denoting uncertainty with the prevailing consistent sell-off, whilst subsequently posting two consecutive positive candles. Having posted a remarkable run of eleven consecutive sessions of lower highs, the market is now posting higher daily lows and higher highs too. This means that RSI has again turned up from just above 30 (a move consistent with the lows of September, November, December and January). Furthermore more the Stochastics are also posting another bull cross. There is a near term resistance at £0.8770 to breach but if this can be done then the swing back higher to play the range once more is on. The hourly chart shows a small basing process and increasingly positive momentum configuration. There is further resistance at £0.8800. Initial support comes at £0.8715 with £0.8707 protecting £0.8667.
Upside traction is finally being seen as a strong bull candle has driven the market through a series of lower highs and seen the buyers back in control. A five week downtrend has been broken, whilst resistance at $1.2412 and subsequently $1.2445 have been broken. This move has come with the RSI and Stochastics improving too. However there is more that needs to be done for the bulls to really feel the tailwind of upside traction, needing the RSI decisively into the 60s whilst the MACD lines also building decisive upside momentum It is important now for the pressure to continue to the upside. The previous resistance of the former lower highs now become a basis of support, meaning that between $1.2390/$1.2445 there is now a band of support for the bulls to use as a near term “buy zone”. The hourly chart shows momentum positively configured now and any unwinding move will be seen as a chance to renew upside momentum, with the hourly RSI picking up above 45 now. There is further pivot support at $1.2360.
With the bulls in control the momentum of the run higher remains strong. This is helping to build a stepped advance that is now moving towards striking distance of the key $1.4345 January high. Another strong bull candle yesterday saw the market closing at a multi-week high and only resistance at $1.4275 is standing in the way of a test of $1.4345. Momentum indicators are strongly configured with the MACD lines advancing decisively whilst the RSI and Stochastics are in bullish configuration. The hourly chart shows positive configuration but a slight consolidation move could mean an unwind towards $1.4170 support area which would be another chance to buy. The stepped nature of the push higher in recent weeks means that the initial support to watch is now near term key at $1.4075 above the pivot and psychological level at $1.4000.
Has a bullish engulfing candle (bullish key one day reversal) changed the outlook in a sustainable way? The recovery in risk sentiment across markets has driven a yen weakening which has left support at 104.55and pulled the market back over 100 pips higher. Certainly on a near term perspective, the market is swinging higher, however there is a band of resistance from the old March lows now into play. The market would need to break the run of lower highs built up throughout 2018 with the first coming in at 106.65, whilst a four week downtrend comes in at 106.80 today. Momentum indicators are ticking higher but also have far more to do for this to be any more than just another rally that will be sold into. The hourly chart shows a near term pivot around 105.30 as support initially. For now the rebound is still in progress, but for how long?
Gold
Gold continues to hold on to the positive outlook within the three month sideways range as yet another bull candle has been posted above the $1341 near term breakout. Momentum is strong with RSI, MACD and Stochastics lines swinging higher. Whilst the market continues to post a series of higher daily lows, the bulls will be holding control, meaning that yesterday’s low at $1343 is important to watch. Subsequently, the old resistance of the breakout at $1341 is now supportive and a key near term level. Despite the improvement in risk appetite it is interesting to see gold holding up well. The hourly chart shows a five day uptrend intact and positive configuration on hourly momentum. An early warning for a loss of momentum would be the hourly RSI below 45 and the MACD lines below neutral. For now though, the bulls will still be eying the January high of $1366, with initial resistance today at $1355.
WTI Oil
The bulls pulled back from a test of the key resistance at $66.65 yesterday and posting a mildly corrective one day candlestick pattern which would have been a disappointment for the bulls. However for now, with today’s early support this is merely a blip in the run higher. Momentum indicators are strongly configured with corrections consistently having been used as another chance to buy in the past couple of weeks. The MACD lines are in strong advance whilst the RSI is in the low 60s confirming the move above the early March high. However the key near term support comes with the pivot around the old March high at $64.25 and if this is now decisively broken (on a closing breach) the immediate impetus of the momentum could be lost. The Stochastics slipping is a caveat but as can be seen back during the big run higher of December/January, this means little until a decisive cross back below 80. For now weakness will be seen as a chance to buy for a retest of $66.65. A breakout above the huge January resistance would open $70 again.
With wild swings on intraday moves, the outlook is increasingly uncertain from a day to day perspective. That comes with the territory of a newsflow driven market amidst elevated volatility. The bears have been replaced by a herd of bulls again to drive the market back higher again, but for how long? Sharp gains yesterday have completely unwound Friday’s huge bear candle and through the 23.6% Fib retracement (at 24,128) which has opened 38.2% Fib at 24,604. This is a move to unwind some of the bear move, but there is considerable work still to be done, with huge overhead supply 24,218/24,453. The hourly chart shows that intraday rallies are failing in the 50/60 region on the hourly RSI. Initial support is around 24,100 whilst yesterday’s low at 24,714 is protecting the low at 23,509.
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