Market Overview
The fear of contagion is gripping financial markets once more and traders are moving out of risk and into safer haven areas once more. Whether the economic turmoil that is gripping in Turkey can be contained is key, but for now, as the Turkish Lira plummets in value, traders are getting increasingly concerns of what the fallout might be. Losing around 16% of value on Friday, the lira continues to haemorrhage this morning, with the USD/TRY rate hitting well above 7 (although as I write is around 6.90 again). However, going exponential in the past couple of sessions, the rate could be drastically different in a matter of hours this morning. This is exacerbating fears that are already manifesting in the trade dispute, with Asian markets under pressure. The Chinese yuan is again weakening this morning and this means a move into the dollar which has been performing strongly again in recent sessions, but moreover into the Japanese yen, seen as the go-to currency during times of elevated market fear. This fear is reflected in the sharp move higher on the VIX volatility which is likely to continue to climb, leaving equities in Europe under pressure this morning. What could change this? Well, Erdogan’s son in law (also known as the finance minister) is expected to make some announcements today to try and stabilize, but this appears difficult right now. Trading with the trends is the safer way to play markets in these times, but markets ca quickly whipsaw and positioning can be very risky.
Wall Street closed lower on Friday with the S&P 500 -0.7% lower at 2833 and futures are another -0.4% lower today. This has pressured Asian markets with the Nikkei -1.8% and European indices are under pressure this morning too. In forex, the dollar’s strength from Friday has continued this morning but as yet is not so aggressive, however, the big outperformer remains the safe haven Japanese yen. In commodities, there is actually a degree of stability on gold (-$2 or -0.2%) and silver (a shade above flat), whilst oil is also consolidating.
It is a quiet start to the week and there are no key economic releases due, so traders will continue to concentrate on the contagion issues.
Chart of the Day – EUR/CHF
The euro broke a key support against the dollar last week as the contagion of risk from Turkey hit across the single currency. Safe haven plays against the euro has subsequently really benefitted. In this way, there has been a huge move lower on Euro/Swiss again. A breach of the support at 1.1365 on Friday with a second big bearish candle shows the pair topping out to a near twelve month low. The concern is that the momentum indicators are increasingly negatively configured and should mean now that any move to unwind the stretched near term momentum is likely to now be sold into. The RSI is below 30 but got to 20 during the May sell-off, but this is also backed by accelerating MACD lines lower and Stochastics also bearishly configured. Any rebound that begins to fail in the 1.1365/1.1450 resistance band is likely to come under renewed selling pressure now. A retest of the August 2017 low at 1.1255 is likely, but once the market begins to move clear of this support, there is very little support until 1.1100. A move back above 1.1500 is needed to improve the outlook on a near term basis.
The breakdown has been confirmed as the euro which has been ranging for the past ten weeks against the dollar, has now decisively breached support at $1.1505. This completes a 350 pip consolidating range breakdown and implies around $1.1150 in the next couple of months. The aggressive bear candle that came with the breakdown is a real concern as it reflects a real sea change in the outlook. Momentum indicators are bearishly configured now, with the MACD lines accelerating lower, RSI around 30 and Stochastics falling. Rallies are now a chance to sell, with the old support at $1.1505 now a major basis of overhead supply. The next support is $1.1310 from July 2017 low. The hourly chart shows there could be a hint of a positive divergence this morning and this could give rise to an initial unwinding move, however it is unlikely to be anything more than another chance to sell. Resistance initially at $1.1425 and $1.1480 is minor.
Selling pressure continues as the market continues in its run of bearish candles. It has now been ten sessions since the market posted a positive close. The momentum indicators reflect how negative the outlook is, and with momentum so strong, there is little reason to go by traditional oversold indication on the RSI (which is now into the low 20s). MACD and Stochastics are equally as negative and further downside is likely in due course. The support of $1.2770 which was the August 2017 low, has been breached and the next level to consider is a pivot at $1.2600. Any strength has to be considered as a chance to sell. The daily chart shows a pick up on Friday from $1.2720, but this is reflected on the hourly chart as simply a consolidation and is little more than another pause for breath as the sellers ready to regroup. Initial resistance is a pivot around $1.2840/$1.2850.
The dollar strength may have been progressing through the major pairs, but not against the safe haven yen. In this time of market fear of contagion, the yen is clearly still a preferred port in the storm. The market has been trending lower over the past few weeks, as the old Dollar/Yen four month uptrend has been broken. But now a key near to medium term level of support has been breached at 110.60 this morning and a close below would really signal a loss of dollar bull control. This move comes with the RSI decisively below 45, MACD lines ready to move below neutral and Stochastics also bearishly configured. A close below 110.25 support would now open the more important 109.35. The old support at 110.60 is now a basis of resistance for a rebound, whilst the growing three week downtrend comes in at 111.20 today.
Gold
With the growing economic turmoil in Turkey threatening contagion, the negative aspects of a broadly stronger dollar on gold are being all but balanced by safe haven flows. Friday’s mildly negative candle for gold was really just a continuation of a consolidation and although the market has dropped back a few dollars this morning, whilst the support at $1204 remains intact, the bulls will remain hopeful. However, although the market broke an 8 week downtrend last week, this consolidation still shows the struggle the bulls are facing, as a couple of negative candlesticks in a row (followed by early losses today) show support pressured. A breach of $1204 opens $1194.50 which is the final real support that is preventing an all-out bearish long term outlook taking hold once more. The resistance at $1220 also continues to build, with last week’s rebound high at $1217.
WTI Oil
After Thursday’s tepid candle, the bulls fought back with a decent rebound on Friday which has tempted the prospect of a near term bounce as the market has moved back above the old $67 pivot once more. The bullish engulfing candle has helped the immediate outlook, but a broad shit towards a more negative outlook is still in process. The mild downtrend comes in at $69.40 today, but momentum indicators are sluggish at best and suggest that rallies will continue to struggle. However, Friday’s low at $66.15 is supportive now, whilst the old medium term pivot at $67 is also a gauge again today. The hourly chart does show initial resistance now around $68.00.
Having looked so confident within the uptrend channel, the bulls have lost their way again. This summer of positive earnings season sees the bulls being pulled back again by geopolitical factors and fears. A couple of bear candles have now been followed by a sharp decline on Friday with a bearish gap still open. This gap still is yet to be filled at 25,494, but the market is now posting concerning developments on momentum. I have spoken previously about the uptrend channel being supportive and the momentum indicators being positive, but this is now changing as the market closed below the channel and the 61.8% Fib support at 25,367 on Friday. The MACD lines have also crossed lower and the RSI is falling at four week lows. The support at 25,120 is now crucial as a breach would complete a top pattern and decisively shift the outlook. How the market reacts now to the sharp move lower is key early this week. If the bulls can quickly move to build support then this can be contained. Closing the gap at 25,494 would be a good start.
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