Market Overview
Markets are back at an interesting crossroads once more as the dollar has managed to pare some recent losses. The correction on the US dollar has been a key feature of trading in the past couple of sessions. However, a tick higher on US core CPI to 1.8% has helped to stabilise the move. It will be interesting to see if it is enough to reverse the correction. The perception of subdued inflation in the US has been one of the driving factors in flattening the yield curve. Can a tick higher in core consumer inflation be enough to assuage fears of another factor that has been flattening the yield curve, the watering down and possible failure of tax reform.
For now the yield curve continues to flatten, with the 2s/10s spread falling sharply at around 65 basis points (at a 10 year low). This fear of a potential inversion of the yield curve is driving a reduction in risk appetite and increasingly concerning equity investors, who are selling off stocks. Subsequently we see the yen, the Swiss franc and the euro all performing better than the Aussie, the Canadian loonie and sterling. The reaction of the markets in the next day or so could give a key indication of whether the market believes the tick higher on core CPI is more than just a one off blip. Markets stand at an intriguing crossroads.
Wall Street closed strongly lower with the Dow over 100 points lower and the S&P 500 -0.6% at 2565. Asian markets have bounced (helped by support coming in for oil), with the Nikkei 1.5% higher. European markets have taken heart from the Asian session and have also found support in early moves. It will be interesting to see if this lasts.
In forex, the dollar has just continued yesterday’s rebound and is trading mildly higher across the majors as the European session takes over. The Aussie is holding up well after Australian unemployment dropped to 5.4% (5.5% exp, 5.5% last), however the positivity for the Aussie has been tempered slightly by a drop in the participation rate.
In commodities the stronger dollar is a drag on gold, whilst oil has found a degree of support today after recent selling pressure pauses.
Traders will be looking for UK retail sales to paint more colour to the picture forming of the UK economy this week. With inflation biting and negative real wage growth the expectation is that year on year UK Retail Sales ex-fuel will actually fall to -0.4% (from +1.6% last month). This would be the lowest reading since March 2013.
The final reading of eurozone inflation for October is at 10:00 GMT and is expected to confirm headline inflation fell to +1.4% last month (from +1.5% in September) whilst core inflation to be confirmed at +0.9% (down from +1.1% last in September). US Weekly Jobless Claims are at 13:30 GMT and are expected to dip slightly to 235,000 (from 239,000). The Philly Fed Business Index is also at 13:30 GMT and is expected to drop slightly to +25.0 (from +27.9) and after the New York Fed manufacturing missed sharply yesterday this takes on more interest. US Industrial Production is at 14:15 GMT and is expected to be +0.5% on the month with Capacity Utilization improving to 76.3 (from 76.0).
Chart of the Day – USD/CHF
The safe havens are suddenly performing much better. This is leading to strength into the Swissy which is subsequently pulling USD/CHF lower. With the bearish candles racking up the market is now increasingly corrective. A series of lower highs and lower lows is building, whilst the strong bear candle from Tuesday has broken a two month uptrend and the support of the rising 21 day moving average. The move higher form yesterday’s intraday rebound which has continued into today’s session gives the sellers another opportunity. The reaction to this rebound could be key today. There is overhead resistance in the band of previous lows between 0.9920/0.9950 which is a now near term sell zone. The RSI is corrective, falling at a 2 month low, whilst the MACD and Stochastics are also accelerating lower from respective crossover sell signals. The hourly chart shows this rebound is simply an unwinding move and helps to renew near term downside potential. Since the market correction kicked in a couple of weeks ago the hourly RSI has continually failed around 60 and hourly MACD lines struggled around neutral. Initial support is at 0.9845 but a breach would open the 38.2% Fib retracement of 0.9419/1.0037 is at 0.9800 and looks highly possible now.
The candle that follows a strong and decisive candle tends to be very telling for how the market is viewing the sustainability of the move. Tuesday saw the strongest bull candle since June posted and it looked as though the bulls were setting off on another run, however their wings have been clipped and the market ended marginally lower on the day and leaving what could now be a shooting star candle. This leaves the bulls in a difficult position of whether to stick or twist. If the market closes lower and leaves a negative candle today then there would be real fears of a reversal to the downside once more. The European session takes over with the market very much in the balance this morning. However, the hourly chart is likely to give some clues as following yesterday’s drop into the close, momentum indicators have unwound to levels where the buyers have resumed control again in recent days. The initial reaction has been positive, with the hourly RSI up from 40, hourly MACD lines turning up around neutral and Stochastics giving a buy signal. Support at $1.1767 could be key now near term, whilst a sustained move back above $1.1800 re-opens the $1.1860/$1.1880 resistance. Can the bulls hang on?
Cable is pushing through this heavy week of tier one data with supports intact as the recent range play between $1.3025/$1.3335 remains firmly intact. Yesterday’s session largely encapsulates the near to medium term outlook, with a doji candle around the mid-point of the session. Direction neither able to gain traction higher nor lower. The market is now almost entirely around the middle of the six week range with daily indicators almost entirely flat. The hourly chart also reflects this with the RSI oscillating between 30/70 although latterly there is the slightest positive bias as the market has edged higher in the past couple of sessions. Initial support at $1.3135 whilst resistance grows heavier between $1.3215/$1.3230. Look to continue to play the range.
The sharp downside break below the near term support at 112.95 completed a small top pattern that implies a move lower of around 150 pips. Momentum indicators are now corrective with the RSI falling below 50 at a two month low, whilst the MACD and Stochastics also continue to deteriorate. This suggests that near term rallies are a chance to sell. That is what we are seeing this morning with a mild bounce that we can look for a selling opportunity. The hourly chart would suggest that the market is unwinding back into overhead supply with the band of resistance 112.95/113.25 and the hourly momentum unwinding back to areas where the sellers will be eyeing an opportunity. A failure of this rebound would open for a retest of the recent low of 112.45 with 111.65 the subsequent support. Key resistance is now 113.90.
Gold
With gold stuck in this near term range the tendency is to see a lot of false signals. The temptation is to read too much into the noise of the signals, but until the market sees a break of the range there is little really to go on. That means a breakout above $1290 or below $1260. Momentum indicators are very much in a rangebound configuration and suggest to continue to treat the market as such. Yesterday’s candle is a case in point. An attempt to breakout left resistance at $1289 only to close $10 lower and reverse once more. A negative one day candle formation (akin to a shooting star) cannot provide us with too much information as it was in effect a mirror opposite candle of the previous day. There is the mildest of positive biases with a run of higher lows, the latest at $1270.50 but the hourly indicators continue to suggest playing the range. Below a minor near term pivot at $1280 suggests the pressure is on the downside in today’s session.
WTI Oil
The pressure of a correction grows as the IEA expectation of a supply glut into 2018 have been exacerbated by a second week of EIA unexpected crude oil inventory build. The unwinding move within the uptrend channel on WTI subsequently continues. The next support is at $53.75 with the bottom of the trend channel coming in around $53.00. The momentum indicators are now decisively deteriorating with the MACD lines crossing lower and the Stochastics also giving a near term sell signal. Rallies are now a chance to sell, with the hourly chart shows initial resistance at $55.80 and then at $56.30/$56.40. The market has held on to Tuesday’s low of $54.80 but near term rallies are now a chance to sell. The hourly chart shows an unwind on the RSI towards 60 and the hourly MACD lines back towards neutral. The bulls need to fight hard to prevent the selling pressure from resuming today.
The Dow continues to form a new downtrend as the market once more leaves a lower high in another corrective session. The concern is also growing that this is a correction that is developing into something more significant. Yesterday’s intraday move below 23,251 support shows the sellers are close to confirming a top pattern now, with a close below 23,251 needed. This would then imply around 350 ticks of further downside. The momentum indicators are certainly pointing to a continued correction with negative traction on the RSI falling in the mid-50s (recent corrective moves in August/September went to around 45 on RSI). The MACD lines are accelerating lower with the Stochastics also in sharp decline. Intraday rallies are now a chance to sell, with a recent downtrend formation from the high coming in today at 23,350. The hourly chart shows resistance at 23,415 and 23,462. Whilst the hourly momentum indicators suggest unwinding moves to 50/60 on the RSI is a chance to sell.
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