Market Overview
Markets are settling into something of a consolidation phase as traders wind down for the holiday period at the end of the year. However that is not to say that markets are lifeless.
A rally on the euro has been hit by increased political uncertainty as the results of elections in Catalonia appeared to show a majority for the collection of pro-independence parties in the region. Far from putting to bed the issue of independence, the result will merely give a headache for the Spanish government and suggests that the region will remain a thorny issue for Spain and the eurozone into 2018.
Tax reform in the US is all but a done deal now, with President Trump only needing to sign the bill into law. However the muted reaction on Wall Street would suggest that much of the move has been priced in, considering the gains of around 25% on the Dow this year, perhaps this is understandable. Furthermore, despite longer dated Treasury yields finally picking up (the 10 year yield above 2.48% is at levels not seen since March), the dollar has yet to see any real discernible benefit, due to other major yields such as on Bunds and Gilts also picking up sharply.
Wall Street closed higher but lost impetus into the close with the S&P 500 +0.2% at 2685, whilst Asian markets were mixed overnight (Nikkei +0.2%) but European markets are dropping back a touch in early moves and it is worth watching the reaction on the FTSE after finally seeing all-time highs yesterday.
In forex there is a hint of some early dollar gains, but mainly this is coming about from euro weakness after the Catalonian elections.
In commodities, gold continues to grind slowly higher whilst the oil price is a touch lower as it tests near term resistance.
On the final trading day before Christmas, the final reading of UK Q3 GDP is at 09:30 GMT which is expected to be confirmed at +0.4%. The UK Q3 Current Account deficit is also announced at 09:30 GMT and is expected to improve slightly to -£21.5bn (from -£23.2bn in Q2). US core Durable Goods Orders are at 13:30 GMT and are expected to be +0.5% (having been +0.9% last month). Core PCE is also at 13:30 GMT and is expected to be +0.1% on the month which would hold the Year on year reading at +1.5%. US New Home Sales are at 15:00 GMT and are expected to drop to 654,000 (from 685,000 last month). The revised Michigan Sentiment is at 15:00 GMT and is expected to be slightly improved to 97.1 (from the prelim reading of 96.8).
Chart of the Day – FTSE 100
After months and months of struggling, it seems that a Santa Claus rally has arrived on the FTSE 100. A very strong bull candle has driven the market to an all-time high above the previous peak in June at 7599. Yesterday’s session saw an intraday all time high of 7610 whilst the market also posted an all-time closing high at 7604. Is this a breakout to be trusted? A massively underperforming index throughout the year would lead to a view that this rally needs to be treated cautiously. The reaction to such a positive candle will be key in today’s session and the early retreat suggests caution is warranted. However if the bulls can regather themselves and post another positive close this will be a strong signal, especially given the early dip (and the shortened session). Momentum indicators are bullishly configured with the RSI ticking into the mid-60s and their highest since mid-October. Furthermore, the MACD lines are accelerating strongly and the Stochastics also strongly configured. Certainly a degree of caution should also be noted, given the reaction of the breakout on the DAX earlier this week. However, there is now support in the band 7560/7599, whilst the bulls will only lose control below the support at 7511. The hourly chart is bullishly configured and interestingly the MACD lines have only just turned higher, suggesting upside potential. In the thin trading markets of trading over the holidays is this a chance for the FTSE to go on a run though?
The result of the elections in Catalonia have added a degree of uncertainty back into the euro. If they can huddle together, the pro-independence parties can form a majority in the Catalonia parliament and far from clearing up the issue of independence, the waters have been muddied further by this. Subsequently, the euro formed a tight doji candle yesterday which broke a run of three positive candles and seems to now be taking more of a negative move today. This has left resistance at $1.1900 and once more the ranging configuration of the past few weeks seems set to prevent a trend from developing. This is reflected in the momentum indicators which are now quickly beginning to roll over and show how tentative any moves in the market appear to be still. The hourly chart shows there is a band of near term support $1.1800/$1.1830 and the spike low overnight hit $1.1815 before a quick rebound. The hourly indicators are now rolling lower and suggest near term, intraday rallies are being sold into. A move below $1.1800 re-opens $1.1715/$1.1735 but moving into the holiday trading period this does not have the look of a market with much direction now.
The near term consolidation continues as we move towards Christmas. The daily ranges of the last two days have been almost half the Average True Range which has subsequently dropped to 97 pips now. The candlestick bodies are small and contradictory whilst the momentum indicators are ever more neutralised. The near to medium term squeeze between the downtrend of the past three weeks and the long term uptrend looks set to be in place as we move into the holiday trading. A lack of direction is reflected on the hourly chart with a 90 pip trading range in the past four days and the market moving with the extremes on the hourly RSI. Support at $1.3330 protects the key $1.3300, whilst resistance at $1.3420 protects $1.3460. The market will lack real direction until the two converging trendlines are breached on the daily chart.
The dollar rally has just lost a degree of its momentum as a mildly negative candle formed yesterday. However the breakout above the medium term pivot around 113.00 remains intact and for now this looks to be a consolidation. The uptrend of the past four weeks comes in at 112.40 and whilst this remains intact the outlook will remain positive for further gains. Although the market has drifted back from a test of the December high at 113.75 which may be of minor concern for the bulls, the configuration on the hourly chart suggests that this is simply a brief unwinding and if the market can develop support above the 112.85/113.10 near term support band, then the bulls will be eying this as a chance to buy. The medium to longer term range resistance is 114.25/114.75.
The rebound of the past 9 sessions continues, however as the light volume of holiday trading comes closer the impetus seems to be waning to the upside. The medium term resistance band $1260/$1270 is still being tested but the question marks over whether this is anything more than a bear rally will persist. Daily momentum indicators are unwinding but the RSI is now around 50 and the rebound on the MACD lines looks to be wilting. Despite this the Stochastics are rising and there is still a consistent posting of positive candles. However, the hourly chart shows the recent uptrend has now been breached and even though momentum indicators remain positively configured, they are lacking impetus now. Key near term support is now in at $1259 and a breach would resume the move lower. Resistance is $1270 and $1277.
WTI Oil
Can WTI breakout of the symmetrical triangle formation that has built over the past few weeks? The resistance of a downtrend that links the highs of the past three weeks is being tested today as the bulls saw a positive reaction into the close last night and the gains are continuing early today. The market needs a move above the reaction high at $58.55 to confirm a bull break and then re-open the high at $59.05. The outlook on the momentum indicators continues to improve, with the Stochastics still swinging higher and the MACD lines bottoming and close to a bull cross. The hourly chart shows a band of support $56.80/$57.20 with initial support at yesterday’s low at $57.65. Hourly momentum indicators remain positively configured to suggest weakness is now a chance to buy. The bulls are testing the water.
After two disappointing trading sessions, the Dow has found support as the dips continue to be bought into. The uptrend of the last three weeks may be creaking but the bulls are still not yet ready to concede control. However, the two bear candles and subsequent doji candle posted yesterday suggest that the market is taking a pause for breath as the holiday season approaches. Despite this though, daily momentum indicators are still positively configured with the RSI in the mid to high 70s, and MACD lines remain strong. With the bulls holding support at 24,697 the gap at 24,688 has been all but filled and the buyers are ready to put pressure back on the all-time highs again at 24,876. A breakout would re-open the way towards 25,000. The hourly chart shows positive configuration on momentum indicators with the RSI continuing to find the buyers returning between 40/50, whilst the MACD lines are consistently positively configured. Continue to buy into weakness.
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