Market Overview
An overnight flash crash has ripped through positions on forex markets. With market sentiment already under pressure, the move came during the handover between US and Asian markets (which can often be something of a “dead zone” for trading) just before 2300GMT , with thin liquidity and huge gaps, exacerbated by a public holiday in Japan. Although the exact reason is as yet unknown (fat finger in illiquid markets?), fuelled by a first profit warning by Apple (NASDAQ:AAPL) since 2002, sentiment plunged further and the Japanese yen rocketed higher. Anything of a risk persuasion in the forex majors has been slammed. Majors priced against the dollar fell, but against the yen was where the pain has been felt the most. The fallout is now underway and there is a degree of unwinding that is now taking place this morning. However, it is events such as these which will play further into market fears. The Apple profit warning is also something that flashes red on the warning sign. Lower expected iPhone sales (paints a picture of global demand problems), whilst also citing issue with slower supply lines (suggests the impact of the US/China trade dispute), all adding up to revenue now likely to be 5% to 10% lower. If Apple can be considered a canary in the coalmine, it has just keeled over. Risk appetite has been notably knocked again and 2019 has got off to a decidedly rocky start.
Wall Street rebounded from sharp early losses to close mildly higher, (S&P 500 +0.2% at 2510) however, with Apple’s after hours announcement, futures at -1.5% lower. Asian markets have been hit, (Shanghai Composite -0.3%) whilst European markets are also lower (FTSE futures -0.5%, DAX futures -0.8%). In forex, there is a decided risk aversion of note, with huge yen outperformance, along with positive showing from the Swiss franc, but also interestingly, the euro is holding up relatively well. Under pressure we see sterling, in addition to the commodity currencies, the Aussie and Kiwi. In commodities there is a continued pull higher for gold, whilst the rally on oil seen yesterday has dropped back again.
It is predominantly a day of US data today but the UK Construction PMI will catch the eye for UK traders today at 0930GMT, which is expected to slip a touch back to 52.9 (from 53.4 last month). The US data kicks off with the ADP (NASDAQ:ADP) Employment change at 1315GMT and is expected to tick a shade lower to 178,000 (from 179,000 last month). The US Weekly Jobless Claims are at 1330GMT and are expected to increase slightly to 220,000 (from 216,000 previous). US ISM Manufacturing for December is at 1500GMT is expected to drop back to 57.7 (from 59.3 in November) which would equal the lowest since the April reading of 57.3.
Chart of the Day – AUD/USD
Negative market sentiment remains a key theme through forex majors and although the US dollar has been underperforming of late, the AUD/USD pair has been relatively stable in recent sessions. That is, until yesterday’s decisive downside break below $0.7018 key support and the subsequent flash crash overnight. Let’s start with yesterday’s breakdown. The move took the pair to a new low dating back almost two years and to open the way for a full retracement to the key January 2016 low at $0.6825, a multi-year low. Then the flash crash overnight saw the market fall almost 200 pips in a few minute and gap below $0.6825. An almost instant unwind has played out but the broad negative outlook is now in place and a retest of $0.6825 when markets are trading properly cannot be ruled out now. The move means that the resistance of the $0.7018 breakdown is increasingly important now, whilst any unwinding move back towards $0.7018/$0.7050 overhead supply is now a chance to sell. Momentum is deeply negatively configured but with the MACD lines once more accelerating lower, as the RSI also has downside potential, the break looks very concerning for the Aussie bulls now.
As traders crawled back to their desks after the Christmas holiday period, it looked as though the euro was preparing for an upside break. However, reduced risk appetite finally seemed to catch up with the EUR/USD pair as a sharp intraday slip on the euro has left a huge bearish engulfing candle on the first serious trading day of the year. An instant breach of $1.1400/$1.1430 support band has put the breakout on ice for the time being and the market again seems set to continue in the sideways range of the past ten weeks. The support at $1.1300 has held overnight and interestingly there is little real sign of the forex flash crash that is so evident across other major pairs. A close below $1.1300 would be negative and re-open the $1.1215 key low, but the rebound candle that is threatening, suggests a lack of decisive intent to break the range.
The market had already been falling yesterday and the recovery outlook seriously questioned when the overnight flash crash saw around 150 pips lost in about 10 minutes. Although much of the crash has been recovered there is still a negative look to Cable that has re-taken hold in the early trading of 2019. The old support around $1.2600 is now an area of overhead supply near term and needs to be watched as a potential near term sell zone. A failure to recover this area will increase pressure back on the lows again. An overnight breach of $1.2475 saw the bounce from $1.2435, but this may now be seen as a support area between $1.2435/$1.2475 to be re-tested. The importance of resistance at $1.2815 is growing.
Dollar/Yen got absolutely smashed in the overnight flash move. The chart shows a gap of around 240 pips lower from 108.00. Although the market has already rebounded almost 200 pips from the 104.95 low there is still a resistance that is now in place. The old support of the May 2018 low at 108.10 giving way may well have played a contributory role and now this area 108.00/108.10 is a band of resistance for any attempted recovery. The thin trading of the moves will mean that this pair will remain a volatile play in the coming days as traders try and sift through the rubble. Clearly the market is very oversold, but it will be difficult to ascertain the true technical outlook. A move like this can often trigger a low, but for now the outlook is too hazy to know.
Gold
Even as the flash crash across forex markets hit overnight, there was little discernible impact to the gold chart. Subsequently the market continues to grind ever higher, accelerating up from the five month former uptrend channel, and within a new sharper six week channel. Momentum is very strong still with the RSI rising into the mid-40s which is the highest since January 2018, but any intraday weakness that looks to find support is now a chance to buy. Breaking through $1281 has once more re-opened the old long term pivot band $1300/$1310 as the next pivot area and potential target. Breaking out above $1266 now leaves underlying demand as support, whilst yesterday’s candle low at $1278.50 is initial support.
WTI Oil
Oil rallied yesterday as trading got off to a good start in the US session. This move has threatened to now drive a shift in outlook as the rebound of the past week has now started to threaten a downtrend that can be derived from the last eleven weeks. However, for the bulls to get excited, this needs to be translated into a run of bull candles, and so far today this looks to be a bit of a struggle. However, there is now a hint some improvement in momentum, with the RSI, MACD and Stochastics lines all threatening to tick higher. The question is now whether this near term tick higher can be translated into something more sustainable as a recovery. First of all, a close above 47.00/$48.00 initial resistance which would break the downtrend but also means a two week high for the price. There is though still considerable overhead supply to overcome, namely the old key lows between $49.40/$50.50. Support at $44.40 needs to also now hold above the key low at $42.35.
There does seem to be a wild ride on Wall Street currently. For the Dow, the Average True Range is over 600 ticks and the highest since February last year as volatility remains a key component. The recovery in the past week has simply unwound the market back towards the overhead supply of 23,345/24,000 which houses several key lows from 2018 and is key resistance. Is this just another rebound to be sold into? Once more, overnight futures are pointing to a struggle at the open today. Daily momentum indicators (especially RSI and Stochastics) have unwound back towards levels where the medium term selling pressure could resume once more. Yesterday’s low at 22,928 will be a gauge today and a close below would be a blow for the bulls now. The hourly chart shows next support is not until 22,267.
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