Market Overview
In the past few months the oil price has been a key factor in driving market sentiment. Gains on oil have been a positive correlation to equity markets and risk appetite. The oil price has broken out above the previous rally high from March to close at its highest level since early December and sentiment has been boosted as a result. The move has come in front of what could be a crucial meeting in Doha on Sunday between OPEC and Non-OPEC countries over the prospect of a production freeze in oil. The news that two of the main players (Russia and Saudi Arabia) had reached an agreement has given the markets the boost. This has helped to drive FTSE 100 to a breakout of resistance yesterday, Wall Street to strong gains last night (S&P 500 up 1%) and Asian markets stronger across the board (Nikkei up 2.8% helped also by a weakening of the yen). European markets are also positive again today, but the oil price has just come off its highs overnight and this could hamper the gains slightly. Added into the mix was an unexpectedly positive reading on the China trade data which saw exports jump +11.5% (which was way better than the +2.6% the consensus expected). Furthermore, imports also were better than expected at -7.6% (-10.2% exp). Now to a certain extent we need to be cautious with these numbers due to the distortions of seasonality (mainly lunar new year), however this has still helped to boost markets today.
Performance on the forex majors shows that the US dollar is making a comeback today. It is interesting that this is coming as Treasury yields have started to pick up again, however the US dollar is showing gains across the majors, with euro, sterling and especially the yen all weaker. The commodity currencies (Aussie and kiwi) are not quite so weak but the dollar has looked to find support today. The gold price has continued from yesterday’s slide and is again under a little corrective pressure. Interestingly the oil price has slid back by almost 2% and this could curb some of the rally on the European equities today.
Traders will be looking towards the release of US retail sales today at 1330BST which are expected to show a month on month gain of +0.4% for the ex-autos data. This would reflect a slight stalling of the recent recovery in the year on year data. There is also the EIA oil inventories report at 1530BST which is expected to show a return to a build up of oil stocks by 2.6m barrels after last week’s surprise drawdown of 4.9m barrels.
Chart of the Day – USD/RUB
The ruble has been recovering against the dollar fort the past few months as the Fed has dialed back on its tightening cycle. This has seen the price of USD/RUB falling from the high around 86.00 and yesterday’s breach of support around 66.70 has been another significant technical move. This support had been building from the late March and early April lows but the breakdown has completed another near term technical bearish continuation pattern (a consolidation rectangle break) which implies around 3.00 of additional downside and an implied target of 63.70. However more than that the 76.4% Fibonacci retracement of 60.70/85.97 at 66.67 has also been breached. This now re-opens for a full retracement back to the October low at 60.70. The momentum indicators are all bearishly configured and rallies are seen as a chance to sell. The old support at $66.68 is new resistance. The hourly chart shows that there are intraday pops to the upside that are failing at consistently lower levels. There is resistance at 66.40 and yesterday’s high at 66.97. There is also a near term pivot resistance at 67.40. Next support comes in at 64.29 and then not until 62.04.
The intraday move on euro yesterday was a good lesson in waiting for confirmation. The initial spike higher looked to be finally breaking the shackles of the recent consolidation with a move above the high at $1.1453. However, this move proved to be short lived and incredibly a 120 pip sell-off subsequently looked to threaten the bottom of the consolidation at $1.1325 before settling down gain. And so we are left with yet another small bodied, long shadowed candle. I also do not believe that the fact that the price could not breach the resistance at $1.1465 is a coincidence, being the significant long term overhead barrier. I am still of the opinion that there will be a near term unwinding correction, with the RSI and Stochastics beginning to show signs of deterioration. As yesterday teaches us though it is best to wait for confirmation of a breakdown of the range first, so a close below $1.1325 would be the signal. This would complete a near term top and imply a move back towards $1.1200 area. The initial weakness of the euro today hints that a breakdown is possible, but we need confirmation.
I continue to believe that near term rallies will be seen as a chance to sell as the bearish medium term trend continue. Have we now started to see the latest rally running out of steam? A mildly positive candle has formed and the daily chart shows the momentum indicators rising, but perhaps once more are now beginning to decelerate. The hourly chart shows that the upside target from the breakout above $1.4170 has been achieved but since doing so yesterday morning, the chart has begun to show corrective signs. The overnight bounce looks to be rolling over again, whilst the hourly RSI and MACD lines are falling away. There is a near term recovery uptrend that the rising 55 hour moving average is flanking at $1.4230 and if this is broken then I would expect a retest of yesterday’s low at $1.4195 and also the previous pivot at $1.4170. Resistance is at $1.4275 and then more importantly at $1.4350. Cable looks to be close to its next sell signal.
A solid positive candle completed yesterday is the first on the daily chart in eight sessions and brings hope of a technical rally, something that is continuing to develop through further gains today. The daily chart has shown a classic cross bull signal on the RSI, whilst the Stochastics are also hinting at a near term positive move. The hourly chart shows the improvement but also that there is further to go before the bulls can believe that there might be some legs in this recovery. The resistance at 109.10 capped an initial rally last week and this now is a neckline for a potential base pattern. A completion of the move above 109.10 would imply around 150 pips of additional rebound and this would be into the resistance band 110/111. The hourly momentum indicators are encouraging and the move above a near term pivot at 108.50 is also a positive move to leave a support band 108.40/108.50 today.
Gold
With the improvement in momentum in the past week or so, I believe that there is a basis of support now between $1190/$1208. However I also believe that this will turn into a choppy medium term trading band now likely to be below $1282. My suspicions have increased after yesterday’s slightly corrective candle has stopped the bulls from gaining traction within the band once more and has turned the outlook weaker again for the near term. I notice the negative divergences that had been building up on the hourly momentum indicators where higher highs of the past few days had not been matched on the hourly RSI, MACD and Stochastics which formed lower highs. The overnight move has also now fallen below yesterday’s low at $1250.90 to form a very small head and shoulders top which implies around $11 of additional downside to $1240. There is though the pivot at $1243 to negotiate first. A breach of the support at $1229 would encourage the bears. The resistance is now in place at $1262.60 to bolster $1270.90.
WTI Oil
In front of the OPEC/Non-OPEC meeting the market will be fixated on headlines of potential agreements. The news that Russia and Saudi Arabia have come to an agreement (although the Russian oil minister has denied the news) has been a boost for and especially if it can be confirmed. However the closer we get to the meeting the more the prospect of the agreement will be priced in. The technicals shows that the March high at $41.90 has now been breached as the strong bull candles have racked up in the past week or so. The breakout re-opens the potential for the upside target of the original base pattern which suggested $43.50. Daily momentum indicators are positive and point towards a test of the highs again. This also trumps what I had been concerned about on the hourly chart (which was a bearish divergence on the recent couple of bull runs higher). To a certain extent this lack of really strong momentum that you would want to associate with a breakout is still present, but the bulls seem to be in control now. There will always be the caveat in the coming days that a clearly a contravening statement about production agreements could impact negatively on oil. However for now dips are being bought and initial support is now around $40.00/$40.90 before Monday’s reaction low at $39.25.
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