Market Overview
The correlation between oil and risk appetite is still alive and well and a key factor for traders. It is difficult for me to focus on too much else other than the oil price at the moment, because it remains such an important driver of risk appetite especially when it comes to equities. Having been weaker by over 2% early in the session yesterday, a sharp intraday rally on oil saw the market closing almost 3% higher on the day. However the move drove a sharp intraday rebound on Wall Street and a general improvement in market risk appetite. The S&P 500 closed 1.1% higher with Asian markets also positive across the board overnight (Nikkei up +0.3%). The weakness in the yen could also have been something to do with the gains, as Japanese core CPI dipping back to zero (from +0.1%) reflects the likelihood of further easy monetary policy from the Bank of Japan. European markets are adding some decent gains at the open as well.
Forex markets show some interesting moves, with the euro picking up, sterling also supported, whilst the dollar has made some ground on the yen in the past 24 hours. The kiwi is also gaining, whilst the Canadian dollar is looking to consolidate yesterday’s gains. Perhaps the odd move is with the gains on gold in the past couple of days and it will be interesting to watch if the improvement in market sentiment continues whether gold can sustain its position up at these elevated levels. A marginal weakness on oil this morning has turned around again and traders will continue to keep an eye on the movement today.
The main economic events come this afternoon with the second reading (Prelim) of US Q4 2015 GDP at 1330GMT which is expected to show a slight slide to +0.4%, something that could impact on the dollar. However the market will also be concentrating on the announcement of core Personal Consumption Expenditure at 1330GMT which is the Fed’s preferred inflation measure. The month on month data is expected to be +0.0% and the data will be interesting to see if the improvement in last week’s core CPI is reflected in the PCE data. Again this will be a dollar driver.
Chart of the Day – USD/CAD
There is a positive correlation between the movement of the Canadian loonie and the oil price. This means that there is a negative correlation between the movement on USD/CAD and oil and with the oil price strengthening again yesterday we have also seen USD/CAD has now falling to a new 11 week low. The oil price has broken its downtrend and USD/CAD is now breaking its big uptrend dating back to May. Momentum indicators are suggesting consistent downside pressure is building on the pair now as a consistent run of lower highs has formed on the price as reflected by the downtrend in place over the past 3 weeks. However yesterday we saw a key bearish move in the price below the support at 1.3635 which has also completed a bearish breakdown from a descending triangle. The triangle derives a downside target on a conservative basis of 1.3380. There is now resistance in the band 1.3635/1.3675 with selling into strength is still a viable strategy. A breach of the overhead resistance at 1.3860 aborts the pattern.
There has been an interesting near term turnaround for the euro with an improvement starting to come through. I spoke about the possibility of a small near term base pattern forming on the hourly chart that needed a break above $1.1050 and overnight in the Asian trading session this has been seen. The daily chart shows the holding of an uptrend that has been in place since early December whilst the momentum indicators have also started to pick up. It will now be interesting to see if this improvement is merely a near term event or something more substantial. The hourly base pattern picking up from the key low now in at $1.0955 means that there could now be a recovery to $1.1145. I discussed yesterday of needing to see the hourly RSI pushing decisively and holding above 60 and this has not quite been the case yet, whilst it will also be interesting to see the reaction in European trading hours to see if the move is a false break. There is though near term support now at $1.1000 and another higher low above there would add to the conviction. The old pivot band at $1.1100 is the basis of resistance still.
There seems to be a near term low in place now at $1.3875 as cable looks to unwind. After the selling pressure seen in the past few days this is not necessarily to be unexpected for a degree of retracement, but the move still looks to be something of a dead cat bounce. With such a momentous breakdown to a 7 year low, the downside break was crucial and a game changer. This looks to be a move simply to unwind some of the oversold momentum. There is now a range between $1.4000 (psychological big figure number) and $1.4080 (the old January low) which will now be seen as a sell-zone. Rallies continue to be seen as a chance to sell and the hourly chart already shows the hourly RSI and MACD lines back around levels where previous rallies have failed. There is support in place now $1.3875/$1.3900 but this rally should be treated with caution, as for me the selling pressure is not over yet.
The prospect that a base formation is building is not too outlandish as the technicals show the signs of improvement. The daily chart shows what could be considered to be a “Morning Doji Star” candlestick formation (strong bear candle, followed by a reversal doji candle and finished off with a strong bull candle). This is a strong formation and comes with the momentum indicators which are beginning to pick up finally, with the MACD lines looking to turn higher, RSI picking up and Stochastics also turning higher. There is more that needs to be done certainly but there are signs of improvement. I continue to also note the failure to close below 112.00. The hourly chart also shows the break higher from the downtrend channel. The Asian trading has just pared some of those recovery gains but the next support is now crucial for the recovery. The support in place at 112.00 is now vital for this near term recovery to continue, whilst I have also previously noted the near term band 112.30/112.70 which has been resistance previously and the bulls would hope this would be supportive. A move above the resistance at 113.15 is important and for the bulls to build a proper recovery there needs to be a push above 113.50 the old 23.6% Fib retracement of the big sell off.
Gold
It is interesting that as dollar/yen has rebounded in the past couple of days (a move away from the safe haven of the yen) another safe haven, gold, has maintained its bull move. However, for me there are still nagging doubts over this move as the momentum indicators are not filling me with too much confidence here. I would want to see the RSI pushing back above 70, whilst the MACD lines have crossed lower and even the sensitive Stochastics are failing to push higher. The move is more of a drift in the price with the daily candles positive without being strong. The hourly chart is more positive than the daily, with support forming near term around the old pivot at $1232. However, even then the hourly momentum has become more benign. This is not the set-up of a chart that is about to burst to the $1261 high and breakout. The key near term support is $1220.80.
WTI Oil
With three completed candles coming above the downtrend the bears appear to have lost the control, whilst there is also now a new uptrend forming over the past 2 weeks that is pulling the price higher. The RSI is at its highest since early November, to confirm the broken downtrend, but also is pushing towards 60, a move above which would suggest positive and strengthening momentum. The reaction low at $30.56 will now be seen as the important basis of support in the near term as yesterday’s strong candle has pushed the price decisively higher to test Tuesday’s high. This means that a test of the $33.60 resistance is now being seen and this protects the key January high at $34.80. This nascent uptrend is now the important factor in the near term and comes in at around $31.50 today. The intraday hourly chart continues to show the rising 144 hour moving average is a basis of support whilst the hourly momentum indicators show a mild bullish bias.
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