Market Overview
The threadbare economic calendar throughout this week has weighed on markets. Traders have been looking elsewhere for a steer on sentiment, and they are finding a string of negatives to weigh on the mind. US COVID-19 infection rates are rising at record levels, now growing by 60,000 per day. President Trump may try to spin this by talking about improved testing, but increasing numbers of daily deaths is the true barometer (now rising at the highest rate since early June). With several of the major southern states re-engaging lockdown procedures (and also New York too), this will hit the economic data for July. Markets are beginning to respond to this. Market breadth on equities does not look great right now. The mega-cap tech stocks look good still, but delving deeper into the old economy stocks, the outlook for US equities becomes more concerning. Treasury yields are reacting lower, with a “bull flattening” move on the yield curve. Yield spreads are around 10 week lows on the curve and this is risk negative. This negative risk bias is now impacting through forex markets where the dollar (still playing as a safe haven) is benefitting along with he Japanese yen. Equities are lower, and oil (playing on the reduced demand fears) is also beginning to slide. There is little once more on the economic calendar to change the narrative today, so unless there is some positive news out there, sentiment could struggle into the end of the week.
Wall Street closed broadly lower with the S&P 500 -0.6% at 3152, whilst futures are showing further weakness (E-mini S&Ps -0.8%). This has weighed on Asian markets, with the Nikkei -1.1% and Shanghai Composite -1.7%. European indices also look set for negative early moves, with FTSE futures -0.6% and DAX futures -0.5%. In forex, there is a risk negative bias, with JPY being the big outperformer, whilst a resurgent USD is not far behind. AUD seems to be the big underperformer. In commodities, there is a pullback on gold by around half a percent, whilst silver is also slightly lower. Oil has slid around -1.5% in early moves.
It is yet another quiet day to end a quiet week on the economic calendar today. The US factory gate inflation is at 1330BST with the US PPI for June. Headline PPI is expected to increase by +0.4% on the month which would pull the year on year reading back to -0.2% (from -0.8% in May). Core PPI is expected to rise by +0.1% and increase the year on year inflation to +0.4% (from +0.3% in May).
Chart of the Day – USD/CAD
There is a fascinating battle for control playing out on USD/CAD. The trend channel lower has been a key technical feature since the spike March high. The dollar has continued to weaken as the pair has posted a series of lower highs and lower lows. A couple of weeks ago, we highlighted the rally from the channel support to channel resistance, where the rebound was then starting to roll over again. This left resistance at 1.3715 as the market has since fallen away to form lower highs and lower lows again. However, in the last two sessions the dollar bulls have once more survived a test of the key pivot around 1.3480 which has been an important gauge for the outlook over the past month. A decisive bounce from the pivot support is now testing the downtrend resistance once more (today at 1.3600). Wednesday’s bearish engulfing candlestick adds to resistance at 1.3625 and this really does have the feel of a key inflection point for USD/CAD. A breakout above 1.3625 would confirm a breach of the near four month downtrend channel, which would improve the near term outlook and re-open 1.3715. Momentum indicators look to be at a turning point. Daily RSI is again around 50, where most of the rallies have failed in recent months. MACD lines have converged and also reflect a turning point, whilst Stochastics threaten a bull cross. However, the bulls have consistently faltered on USD/CAD recently and the medium term downside bias remains. A near term rally threatens but unless the bulls can break above 1.3715 we would be sceptical about looking at long positions. A move failing under 1.3715 would likely represent another selling opportunity for further pressure on 1.3480. A move above 1.3715 would signal a decisive improvement.
Has this been another false move on EUR/USD. Early in yesterday’s session, the dollar bulls were on the ropes as the pair had pulled through the resistance of $1.1350. However, a failed upside break saw a turn lower to leave resistance at $1.1370 and form a negative candle. This has dragged the price back under $1.1300 and now threaten initial support at $1.1250 this morning. Already this move has breached what was a building mini uptrend and is certainly a disappointment for long positions looking for a breakout of what is still a medium term range. Does this now mean that EUR/USD will be swinging lower within the range back towards the lows around $1.1165/$1.1190 again? A close under initial support at $1.1250 may well determine this. Also watch daily RSI for a move below 50 which would suggest growing negative momentum bias. Our preference remains to buy into supported weakness within the range, so this move is likely to be the source of another chance to buy. Playing this range in recent weeks shows the need to have limited time horizons for long positions and active use of stops. The latest disappointment from yesterday once more reflects this as resistance has firmed between $1.1350/$1.1370.
It is an important moment for the Cable bulls. We have discussed recently the importance of the approaching seven month downtrend (which comes in today at $1.2695). Yesterday’s failure at $1.2670 (also a shade under an old mid-June lower high of $1.2685) will leave Cable bulls concerned that this is another failed rally. The move looks to at least be perpetuating the medium term trading range. There is support of an eight day uptrend being tested this morning at $1.2580. A closing breach would disappoint the bulls, but the more important reaction would be around the neckline of what is a near term base pattern a t$1.2540. Given how Cable is still in a medium term range (between $1.2075/$1.2810), closing under $1.2540 would at least neutralise the outlook within the range. Under $1.2435 would then turn the market bearish within the range. Momentum is beginning to react too, with Stochastics now threatening a “bear cross” which would be just the third in three months and the previous two have all been the precursor to a decisive swing lower once more within the range.
After about a week of trading where Dollar/Yen was looking for direction, finally something seems to be stirring, and it is to the downside. With Treasury yields beginning to threaten lower, it is notable that Dollar/Yen is also beginning to slide. Technically, we see a run of negative candles beginning to develop, with two negative closes in a row and a move lower early today. Near term support at 107.20 has been broken and negative momentum is being generated. MACD lines are now ticking lower, whilst daily RSI falls away along with Stochastics. This is growing further today as the market moves to test 106.80 support. A closing breach of 106.80 would once more open the key medium term range lows around 106.00. The hourly chart momentum signals are now taking on a growing negative configuration, with hourly RSI consistently now failing at 50 and pressurising 30 as intraday rallies are now failing at lower levels. Initial resistance is beginning to develop between 107.20/107.40.
After the breakout comes the pullback. This seems to be a feature of breakouts on gold over recent months. We do see that the breakout this time has been built on firmer positive ground, but it will be interesting to see just how far this unwind now goes. A mild negative candlestick yesterday has taken some of the sheen off the move to multi-year highs, but for now this seems likely to provide the next opportunity to buy. The support of the latest breakout is at $1789, whilst support of a five week uptrend is at $1783 today. This is a good basis for the bulls to work with as the market slips a shade further this morning. We look for buying opportunities now between the $1764 and $1789 old breakouts. This is now a zone of underlying demand. During previous breakouts, momentum indicators have had questionable strength. However, this time we see RSI pulling back from the 70s, MACD lines rising for the past three weeks and Stochastics strongly configured. A near term unwind would help to renew upside potential and should (at this stage) be viewed as a positive move. Below $1764 would be disappointing for the bulls now, whilst below $1744 would start to become a decisive bull failure. For now, we see this as an opportunity for the bulls.
Is the consolidation starting to turn corrective? After a run of extremely tight sessions on oil where the market had been just creeping higher, a decisive close lower has broken the support of the eight week uptrend. We have been concerned by the lack of conviction in recent sessions, and now it seems that the market is turning corrective on a near term basis. Daily momentum indicators have held a fragile looking positive outlook, but this has now turned sour on yesterday’s move. Stochastics have decisively swung lower, MACD lines seem to have “bear kissed” lower and RSI has fallen to an 8 week low (even if it is still above 50). The hourly chart shows a small top pattern completed yesterday below $42.50 which implies a slide to $41.50. Hourly indicators are suggesting near term rallies will struggle amidst this unwind, with resistance $42.30/$42.70. Given the slide in signals, we would be looking for a move back into the $41/$42 area. This would be an acceptable correction for the bulls and so still maintain a positive medium term bias. A move below $39.50 becomes a deeper correction, whilst below $37.00 would be a key medium term breakdown. For now, this is just a near term slip, and the bulls can remedy it quickly with a move back above $42.70.
Near term corrective pressure is building once more on the Dow. The tech heavy NASDAQ may have been pushing all time highs, but the Dow is struggling under the weight of older economy stocks which are performing no where near as well as new age tech. For the Dow technicals, another failure around the 26,300/26,610 resistance leaves the continuation of a now four week trading range (between 24,845/26,610. There is nothing overly bearish at this stage, but a swing lower within the range has taken hold as two of the past three sessions have made decisive negative candles. This lends a near term sell into strength strategy and a growing bias towards the lows of the band. Daily Stochastics have crossed lower, RSI is back under 50 and MACD lines continue to struggle around neutral. The hourly chart shows a lower high at 26,110, whilst the move below 25,715 completes a near term top that implies a move towards 25,125 in the coming week. The Dow is now near term corrective within the range whilst the resistance of 26,110 is intact.
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