Market Overview
After over a week of markets consolidating sideways there was finally some direction on Friday as the dollar found traction in the wake of the higher than expected CPI inflation data. However, this dollar strength seems to just be traders playing around the edges as once more the markets are looking to retrace some of this moves this morning and it is likely that there will still be a settling in front of the two major risk events of the week, the Federal Reserve and the Bank of Japan.
This CPI data will do little to sway the Fed. Effectively it is one piece of data improvement in a long line of data disappointments, and in any case it is not even the inflation reading that the Fed looks at (the FOMC considers the Personal Consumption Expenditure to be a more effective reflection of inflation). The pricing of September Fed Funds futures still suggests just 12% probability of a rate hike, and whilst December remains probable at 55%, traders will now begin to position far more conservatively into the meeting.
Wall Street went into the close on Friday mildly lower with the S&P 500 off by -0.4%, whilst Asian markets have been more positive today (the Nikkei was closed for a public holiday) as the oil price has started to rally again. Talk has resurfaced of an agreement between OPEC and Non-OPEC countries at the meeting in Algeria at the end of the month, whilst it also looks that there are complications over getting Libya’s disrupted oil exports back up and running could also hamper supply.
European equity markets are rebounding after Friday’s declines and running with the improvement in oil and are solidly higher today. There has also been a correction on the dollar following Friday’s strength which is impacting across markets. In forex the dollar is the biggest underperformer of the major currencies, whilst gold and silver are also nicely higher.
There is little on the economic calendar today with nothing other than the NAHB Housing Market Index at 1500BST and is expected to stay at 60.
Chart of the Day – EUR/JPY
A major symmetrical triangle pattern which reflects the consolidation on Euro/Yen in the past three months is on the brink of being breached to drive near term direction. The market has moved broadly sideways over the past couple of weeks but the weakness in the past couple of sessions has put the lower uptrend support under pressure.
This pressure continues today. The daily indicators are beginning to gain traction to the downside with the Stochastics falling to a four week low and the RSI also dropping below 50. The support at 113.80 is the near term key level before 112.75 but 112.30 is the key August low and will be seen as crucial for the sustainability of a downside break.
There is also a technical breakdown target of 111.25 from a close below 113.80 this week. Are we about to get some direction even in front of the BoJ/FOMC decisions? The hourly chart shows an old pivot at 114.60 is still active (and is initial resistance), whilst the recent range resistance is 116.10/116.35.
After over a week of the pair consolidating sideways, a big bearish candle on Friday has threatened to drive some direction. In isolation you would say that the candle shows that the bears are ready to take control again, with the Stochastics finally with a bit of direction once more. However, the early caution again today which is showing as a mild retracement shows how perhaps there is a lack of willingness still to take a decisive view.
The support at $1.1120 which was the late August low is still intact and although there is a corrective bias now the $1.1200 support has been broken (which also now becomes overhead supply resistance) I am still expecting a lack of conviction to trading in front of the Fed.
The hourly chart shows that the move today is just unwinding some of Friday’s bear momentum and a new range could form in the next couple of days between $1.1120/$1.1200. Subsequent resistance is at $1.1255 and then $1.1285. The long term pivot band $1.1050/$1.1100 remains supportive.
With the sequence of lower highs and lower lows, I have been expecting the slide to drop back to the medium term pivot at $1.3060, but the strong bear candle on Friday burst straight through this support and closed once more back below $1.3000. The extent of the corrective outlook on the momentum indicators suggests that there is still bear pressure on despite the mild retracement that is currently being seen this morning. The $1.3060 now also becomes an initial basis of resistance.
The hourly chart shows that the outlook remains corrective and that rallies should continue to be seen as a chance to sell. The hourly momentum is now unwinding some of the bear momentum from Friday and there is now a 100 pip band of resistance overhead between $1.3060/$1.3160.
Look for the hourly RSI to unwind back towards 50/60 and the hourly MACD lines back towards neutral as this is around where the recent selling pressure has resumed. With the bearish bias in the chart a retest of the overnight low at $1.2990 cannot be ruled out and the next support below there is the August low at $1.2863.
The dollar strength was a big feature of trading on Friday afternoon, with major forex pairs breaching key levels, but it was notable that the impact on Dollar/Yen was negligible. Aside from a slight rebound, once again there has been very little impact on the daily chart (or even hourly chart for that matter) with traders now set firm as they look towards Wednesday’s key monetary policy meetings for both central banks.
The price may not be showing any real direction, but interestingly the Stochastics continue to point towards a bearish bias. Friday’s reaction higher merely chows up as a very small positive bodied candle and is in no way a signal that the bulls would want to be decisive on.
The hourly chart shows that the initial resistance at 102.75 was never really even tested and once more the pair has dipped back to the near to medium term pivot around 102.00. Initial support is at 101.72 before 101.40 and the key near term range level at 101.18. For now the long term downtrend channel continues intact, with 103.35 as key resistance near term.
Gold
Once again, the dollar was strong on Friday but another of the perceived “safe haven” plays managed to hold up fairly well in the face of the dollar strength. There was some weakness on Gold but the support picked up at $1306.25 to maintain the long term uptrend channel.
This also comes as the support of the rising 89 day moving average (today at $1309) has also kicked in, as has the bottom of the medium term range. It is clear then that this is a key moment for the gold bull outlook and for now the buyers are supportive, however there still needs to be a sustained improvement in the configuration of the technical indicators for there to be a more positive outlook.
The hourly chart needs to have a move above the 89 hour moving average (currently $1318), with the hourly RSI sustaining above 60 and the hourly MACD lines holding a break above neutral. There is also initial price resistance around $1318 but the more considerable resistance band is $1325/$1330. A loss of $1306.25 would now be concerning with a breach of $1300 being a signal for a significant change in outlook.
The bears remain in control with rallies continuing to be sold into. Bearish pressure continues to drag the oil price back to test the big near term support at $43.00. There may have been an intraday test below the support but it will be interesting to see how significant Friday’s close back above $43.00 will prove, especially considering the early rebound today.
The longer term chart shows that this is right on the support of a prospective uptrend dating all the way back to the February 2016 low. The concern is that the near term technicals are corrective and suggest that this uptrend and support around $43.00 will come under continued pressure.
A decisive breach would open $41.10 but also potentially the $39.25 support of the key August low. However, there pressure may be briefly improving, with the overnight rally now looking to break a 7 day downtrend, however the hourly MACD lines and hourly RSI continues to show rallies being sold with downside potential being renewed.
Resistance at Thursday’s high of $44.35 will be important, whilst an old support band $44.55/$45.75 is a more significant overhead supply and needs to be breached for the bulls to sustainable call for a recovery again.
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