Market Overview
Increasing concern of geopolitical tensions in financial markets as risk appetite has taken a hit and safe haven plays have broken out. This came yesterday amid suggestions from North Korea that any act of force against it could result in a nuclear attack on the United States. Key resistance levels have been broken on gold (closing at a 5 month high), the yen (USD/JPY below 110) and US Treasuries (the 10 year yield below 2.300%). US foreign policy has taken over market concerns with US Secretary of State Rex Tillerson set for a meeting in Moscow with the situation in Syria sure to feature high on the agenda. However, it was interesting to see equity markets initially reacting lower yesterday afternoon, only to bounce into the close. Geopolitical issues can often drive only a brief reaction on markets and that would be the concern over whether to chase the breakouts. The VIX volatility index pulling to its highest since November reflects the concern traders now have as they look to add downside protection to their portfolios.
Wall Street closed almost flat on the day after the Dow lost over 100 ticks initially, the S&P 500 -0.1%. Although Asian markets were lower overnight (Nikkei -1.0%), European markets are mixed today. In forex markets there has been a consolidation overnight, with almost no key moves, whilst gold is also flat after yesterday’s strong gains. The bulls remain in control of oil and there is a further mild move to the upside again today, with the EIA inventories certain to be a focus.
The UK data will again be key today but this time employment is in focus. UK unemployment is at 0930BST and the headline is expected to stay at 4.7% with the claimant count expected to drop by 10,200. However the big interest will be with the UK average weekly earnings which are expected to drop to 2.1% YoY ex-bonus which would mean that as a result of headline CPI staying at +2.3% yesterday, real wages will have gone negative again. The Bank of Canada is expected to hold rates at +0.5% and it will be interesting to see the sort of message that the BoC wants to convey over why its preferred inflation trends are falling. Use of the word “transitory” would be considered hawkish. The EIA oil inventories are at 1530BST and are expected to show crude oil stocks with a build of +0.8m barrels, distillates with a drawdown of -1.0m barrels and gasoline stocks with a drawdown of -1.9m barrels.
Chart of the Day – DAX Xetra
The corrective pressure ramped up yesterday afternoon with the flight out of risk assets really taking off. This pulled the DAX over a percent lower however, a late rally into the close posted only marginal losses on the day and provides an uncertain outlook moving into today. The market has been in a primary bull trend channel since June last year, however there is an uptrend formation over the past two months (since the bull run took off from 11,400) which held yesterday. With the momentum indicators turning lower the bulls will need to remain firm to prevent an increasingly corrective outlook from taking hold on the DAX. The RSI has continually bottomed between 45/50 in the past few months and that means the bulls need to work to prevent a corrective outlook really developing. The hourly chart shows a negative configuration has formed on RSI (failing around 50/55) and MACD lines (failing under neutral). The hourly chart also shows a near term resistance is in place between 12,145/12,221 will be key today. A failure to breach it could see the sellers regaining control once more.
The euro has been trending lower over the past couple of weeks, but the consolidation seen over recent days has now started to pull the market sideways and breach the trend. However this looks likely to still be a pause within the bear phase. A similar move was seen last week, where the market consolidated for a few days before the negative momentum resumed. With the bearish near to medium term configuration of the configuration of the momentum indicators, the suggestion is that rallies would be a chance to sell again. The two completed candles this week have been mildly positive but with a struggle for traction, this does not look to be the precursor to a recovery. The hourly chart shows yesterday’s move failing under the $1.0640 basis of initial resistance which remains an area of overhead supply. As long as the market continues to trade below the $1.0710 pivot, the outlook will remain corrective. Expect a drift back to test the $1.0568 low before further downside to $1.0523 and $1.0492 is seen.
The market has again maintained the near term ranging outlook as a strong positive candle of around 80 pips higher on the day pulled Cable back to test the resistance at $1.2505. In the past two weeks a string of lower highs have been posted but the trend has been broken and with the continuation of a three week range between the support at $1.2345 and resistance at $1.2615, the ranging outlook has been maintained. A move above $1.2505 would now re-open resistance towards the top of the range with $1.2557 and $1.2615. Daily momentum indicators have ticked higher with the RSI and MACD lines steady and Stochastics crossing higher. The hourly chart shows the corrective outlook has now started to improve whilst there is a basis of support $1.2420/$1.2440 for the bulls to work from today. A break back below $1.2400 would see the outlook deteriorate again.
After over two weeks of downward pressure, the support at 110.09 finally gave way yesterday, as the demand for the safe haven yen meant that a strong bear candle was posted. Opening around the high of the day and closing around the low suggests the sellers are in control now and there have been further losses overnight. Momentum indicators confirm the negative configuration with RSI, MACD and Stochastics all ticking lower. The 50% Fibonacci retracement of 100.07/118.65 comes in at 109.35 and is a basis of a potential consolidation, however there is little price support now on the pair now until 107.50. The market seems to be continuing to unwind the November rally (in the wake of Trump’s victory). The 110.09 breakdown now becomes an area of overhead supply for a pullback today.
Gold
Gold has broken out to its highest level since November 2016 as the safe haven demand has really kicked in. The strong bull candle added over $20 yesterday and closed above Friday’s high of $1270.50. The move has also breached the downtrend that has been a resistance for the rallies on gold since July 2016. Yesterday was the strongest bull candle on gold since the rally began again in mid-March and it will be interesting to see how the bulls respond today. Often there can be retracement moves and given that the candle was borne out of geopolitical concerns, this would again be a possibility in the next day or so. Despite this though, technically the move is very positive with the momentum indicators strong. The confirmed breakout above $1261 implies an upside target of $1282, but there is little real resistance until $1300. The hourly chart just shows a minor rolling over of momentum as the Europeans take over the session and this ould induce a pullback. The bulls will certainly now be looking at the support band $1261/$1270.50 holding this time.
WTI Oil
Once again the bulls responded well yesterday and the uptrend of the past couple of weeks remains firmly intact. Intraday corrections continue to be seen as a chance to buy. Another candle with the market closing towards the high of the session reflects the underlying strength of the recovery still. The bulls would certainly be looking for support to form around $52.50 which is the confluence of the early March low with the uptrend, however with the run of daily higher lows continuing, it is difficult to see this opportunity arising. Momentum indicators remain strongly configured and suggest that intraday dips are a chance to buy. Looking on the hourly chart, even if the uptrend is breached, the bulls will retain control of the run higher whilst the reaction low at $51.50 remains intact. Resistance is at $53.80 initially, which begins the old range resistance from early March, with $54.45 and $54.95 following.
The reduction in risk appetite amidst geopolitical tensions had initially started to drive the Dow lower yesterday, only for a late rally to once again post very marginal gains on the day. The market has now closed on each of the last four sessions within 11 ticks, which is an amazing consolidation. However yesterday’s session is a warning shot that the sellers are still ready to pounce. The downtrend of the past five weeks continues, and it will be interesting to see if the market can begin to sustain some real direction when a decisive candle is finally posted. The downtrend that has been pulling the market lower over the past five weeks remains a barrier, today at 20,695 and means that the downside pressure is growing. Momentum indicators may have plateaued but there is still a mild corrective undertone. The hourly chart shows how the support at 20,512, with hourly momentum indicators deteriorating. The key support remains the March low at 20,413 below which there is no support until the old breakout level at 20,125.
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