Market Overview
As yields on global bonds rise, equity markets are becoming increasingly under pressure. Top patterns and uptrends are being broken on European major markets whilst Wall Street is putting pressure on key near term range support. The rising yields are a reaction to the shift in emphasis from central banks away from their long held view that advocates ultra-loose monetary policy. However, can the data back this up?
Today’s US Employment Situation report is crucial. Last month’s Non-Farm Payrolls were a disappointment on headline jobs but also average hourly earnings. Can this change this month? Markets tend to be cautious ahead of payrolls, with traders mindful of the potential volatility in response to the announcement at 13:30 BST. There is a mildly dollar positive move early today in front of Non-Farm Payrolls, but it is interesting to see the safe haven plays the most under pressure with the yen underperforming and gold also lower. This is continuing the correlation that as Treasury yields go up, gold goes down.
Wall Street closed weaker yesterday as the S&P 500 dropped -0.9% to 2410, whilst Asian markets have also been lower overnight in response (Nikkei -0.3%). European indices are also lower in early moves.
In Forex the dollar is marginally stronger across the majors but the yen is the big underperformer.
In commodities, the precious metals of gold and silver are both weaker as the dollar has picked p today, whilst oil is back lower again.
Traders will likely be keeping their powder dry until the key payrolls report in the European afternoon. However there is still the UK Industrial Production data at 09:30 BST which with a +0.4% monthly improvement is expected to be +0.2% for the year (up from -0.8% last month).
The big focus will be on the US Employment Situation report. The headline Non-Farm Payrolls are expected to recover to +179,000 (up from +138,000) whilst attention will also be paid to prior month revisions. The average hourly earnings will also be keenly watched with the recent inflation drop in the US potentially a reason for the Fed to pullback on tightening too quickly. Average hourly earnings are expected to be +0.3% for the month which would improve the year on year number to +2.7%. Unemployment is expected to be 4.3% again, whilst the decline in the U6 Underemployment number (last month 8.4%) will be of interest as the US closes in on levels considered to be full employment. This in conjunction with the participation rate will also be important, with the participation rate 62.7% last month.
Chart of the Day – DAX Xetra
The big breakdown below the support at 12,490 was a key move that changed the sentiment on the DAX. Until then the market, the market had been consistent throughout 2017 in using old breakouts as the basis of new support, in addition to posting a series of higher lows. However having subsequently broken the support at 12,375 these were two key levels of support breached and suggests that the bulls are not in the control that they once were. The key support of the May low at 12,490 has also become a basis of resistance throughout this week, where for four days in a row the market has peaked within 10 ticks of 12,490 and failed. Yesterday’s strong bear candle adds to the burgeoning negative momentum now.
This deterioration is reflected also in the momentum indicators with the RSI again pulling back below 40, the MACD lines which are now falling below neutral for the first time in 12 months and negatively configured Stochastics. Watch for the support of last week’s low at 12,319 being breached (especially on a closing basis) which could open the downside once more. The break below 12,490 implies around 460 ticks of downside to 12,030 in the coming weeks and rallies are increasingly being sold into. The hourly chart shows resistance initially around 12,400 which remains intact early this morning as the market has dropped back at the open.
Corrections remain a chance to buy on EUR/USD and the drift back towards the previous breakout around $1.1300 remains that chance. Yesterday’s strong bull candle has stabilised the corrective move and put the bulls back in control once more as we move towards todays Non-farm Payrolls report. The technical configuration remains strong with the momentum indicators all in positive configuration and suggests that weakness should continue to be bought into.
The market is consolidating in the early moves today, which is normal in front of payrolls, but there is little reason not to continue to push higher to retest the $1.1445 high and on towards the breakout target of $1.1500 in due course. The support of a three month uptrend comes in today at $1.1250, whilst Wednesday’s reaction low at $1.1310 adds to the key support building around $1.1300.
With two consecutive positive candles, the sterling bulls appear to have regained their poise moving into payrolls. This has settles a corrective drift seen at the front end of the week and has also maintained the momentum indicators in positive configuration. The RSI is settled above 50 whilst the drifting lower on the Stochastics has also been halted, whilst the MACD lines continue to rise. The support has been left at $1.2890 and it seems on the hourly chart that the earlier shift to more corrective momentum has been negated.
The consolidation forming early today reflects the uncertainty of what lies ahead, with Non-farm Payrolls this afternoon, but unless there is a decisive breach of $1.2890 there will be little change to the strategy of using weakness within the range to buy Cable whilst the market remains above the pivot at $1.2775.
Once more it looks as though the mid-week consolidation is ready to be pounced upon by the bulls. After three days of indecisive small bodied candles, the bulls are pushing higher again. This continues the stepped advance of this recovery and the market is increasingly pushing towards a test of the key resistance at 114.35. This is also around the 23.6% Fibonacci retracement of 100.07/118.65 which is at 114.27. The question is whether Dollar/Yen can go on a strong bull run now and sustain the momentum.
The technical studies all look to be positively configured with the MACD lines rising strongly, and the Stochastics bullishly configured. The RSI is now approaching 70 and also looks strong, but it was interesting to see the RSI strong in May before peaking at 73. Early gains today are strengthening the support band now between 112.70/112.90 and corrections are a chance to buy. Watch out for volatility today as this pair tends to have a significant reaction to payrolls.
I discussed yesterday the bullish engulfing candle and how it did not appear to have the impetus in the recovery to become a key chart feature. This seems to have been correct as yesterday’s candle suggested a rolling over, a move that is being exacerbated by today’s early slide.
The momentum indicators are a concern for the bulls with the negative configuration across the board still. This is all set up for continued pressure on Wednesday’s low at $1217.10 which protects the key May low at $1213.80. The four week downtrend provides a barrier at $1237 whilst Thursday’s high at $1229 is initial resistance now, with rallies consistently being sold into now. The hourly chart shows 50/60 on the hourly RSI is a selling zone, whilst the MACD lines have also rolled over again around neutral. Below $1213.80 opens the key March low at $1194.50 and the key January low at $1180.
WTI Oil
The bulls looked to react yesterday but the sharp bearish engulfing candle from Wednesday that now dominates the near term outlook took its toll again and the rally looks to have failed. Another negative daily candle (despite a close higher on the day) adds to the corrective pressure that is beginning to build once more. Resistance is at the failed high of $46.53 now and momentum indicators are beginning to react lower. The crossover on the Stochastics was always likely to be the first mover but the RSI is also back below 50 too.
There is still a sense on the hourly chart that this is merely unwinding oversold momentum and this does not bode too well for the bulls. The sellers will now be eying Wednesday’s low at $44.50 as a decisive breach would really open the downside in the correction, with the old low at $43.75 next support.
Once more just as it looked as though a hint of bull control was returning, it has been a false start. The trading range which has formed between 21,197/21,563 continues with another negative candle. The momentum indicators have ticked lower again and it will be interesting to see if this continues as the bulls are starting to become a bit tired, especially with the RSI failing around 60 for the second time in just over a week. Watch for the RSI back below 50.
Furthermore, dropping below Tuesday’s traded low of 21,392 suggests the momentum has completed come out of the bull move now. The support at 21,325 has been breached and this now opens a test of the range low. The hourly chart momentum suggests that this is merely part of the range play and not to get overly negative yet. However another strong negative candle today, especially with a breach of 21,197 and it becomes a different story. For now though, continue to trading this as a range play.
DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.
All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.