Market Overview
Dollar weakness and huge gains on Wall Street have been the two market themes have dominated the opening weeks of 2018, however are these trends about to see a correction? Wall Street opened sharply higher yesterday only to see the largest one day intraday correction in over a year to leave the Dow, S&P 500 and Nasdaq 100 all lower on the day. One bearish session does not make a trend, but the manner of the reversal will have concerned the bulls, with VIX volatility jumping to six week highs. There certainly is room for a correction after the huge gains.
Concerns over the potential for a US Government shutdown that could come on Friday have been a factor in the intraday retreat and could drive continued concern for the bulls today. Perhaps, more subtle has been a slight technical improvement for the US dollar. This less obvious improvement is also less developed, but after having come under so much pressure in recent weeks, the dollar is now showing signs of a fightback. Treasury yields may have ticked a touch higher but there is little really to drive the move other than shifting sentiment. As such early signs of reversals are being seen across the major pairs, whilst gold and oil are also threatening to slip back too. The reaction of today’s session could be key as to whether the momentum behind these moves develops.
Wall Street’s intraday reversal was remarkable with the S&P 500 closing 10 ticks lower at 2776 (-0.4%) whilst Asian markets have also been weaker overnight (Nikkei -0.4%). European indices are reacting to the late decline in the US with the initial corrections, whilst the DAX looks to be an initial underperformer.
In forex markets we see the dollar making solid gains across the majors, with the euro being a slight underperformer ahead of inflation data.
In commodities, gold and silver are towing a similar line of correction, with oil consolidating following yesterday’s slip.
Final Eurozone CPI will be a key factor for traders this morning, at 1000GMT. The expectation is that the final headline CPI for December will confirm the flash reading of +1.4% which would be a tick lower from the +1.5% in November. Final core CPI is expected to be confirmed at +0.9% as it was last month.
Into the afternoon, traders will be watching out for US Industrial Production which is at 1415GMT and is expected to rise by +0.3% on the month (+0.2% MoM last month), whilst Capacity Utilization is expected to improve slightly to 77.3% (up from 77.1% last month). The main announcement of the day will come from the Bank of Canada monetary policy at 1500GMT which is expected to hike interest rates by 25 basis points to +1.25% (from +1.00% last month).
Chart of the Day – FTSE 100
Posting a second consecutive negative candle begins to ask a few questions of the FTSE 100 bull run. Having been in a sharp uptrend since the low around 7300 in early December, the market had pulled sharply into new high ground. However FTSE 100 has now posted two negative sessions in a row to break the support of a five week uptrend. A bearish engulfing candle (also bearish key one day reversal) comes as the market just failed under the resistance of Friday’s high. The resistance is subsequently strong at 7792 now. The intraday sell-off on Wall Street and early drop back today adds to the growing sense of correction. This comes with the RSI crossing back under 70, the Stochastics crossing lower and the MACD lines also threatening a bear cross. The indicators are aligning for a corrective move. The hourly chart shows a series of negative divergences on the RSI and MACD lines with the market now below the 55 hour moving average for the first time since early December. Is the FTSE 100 ready to retrace some of this big rally? Support is at 7716 and 7692.
The market is beginning to throw off a few mixed signals in the last day or so and the potential for a near term dollar rally is growing. An initial dollar rebound could not be sustained into the close, but a doji candle was formed (signifying uncertainty), whilst the moves early today have been equally uncertain. This comes with the RSI over 70 but beginning to tail off in its advance, whilst the Stochastics are also just plateauing too. The overnight high at $1.2322 is initial resistance and if the market now forms a negative candle today then the temptation to take profits will grow. This could usher in a move to unwind some of the recent gains for a retracement towards the old key breakout around $1.2090. The hourly chart shows support around $1.2095 which would be a small top pattern if broken. Hourly momentum indicators are also showing minor negative divergences too. On a medium term basis the pair remains a buy into weakness but the prospect of a near term correction is growing.
The chart of Cable over the past few days looks very similar to that of EUR/USD, with the late rebound into the close yesterday, only for the market to seemingly roll over again this morning. The key will be whether the bulls react positively as the session develops, as they did yesterday. Currently, the threat is that the dollar looks to be preparing for a near term rally that would drag Cable lower again to retrace some of the recent gains. The momentum indicators are now set up in stretched positions that could easily drive the market to unwind on a near term outlook. There is a basis of support from the old key breakouts between $1.3610/$1.3655 which would be a prime area of support for a minor correction now. As with the euro there is a potential small top pattern forming on the hourly chart, with support at $1.3740, whilst the hourly momentum indicators are also showing a series of negative divergences. The overnight high at $1.3835 is now resistance.
As showing across the major pairs this morning, Dollar/Yen looks to be preparing for a near term dollar rally. The initial look at a rebound could not be sustained yesterday but the dollar bulls are at it again today and it will be interesting to see if this time the move can stick after six consecutive negative sessions. The old key breakdown of the November low at 110.85 is still a basis of resistance and is being tested as the market has bounced 30 pips this morning. The daily momentum indicators show that the RSI is beginning to bottom around 30 with the Stochastics also starting to tick higher. The hourly chart could be key with resistance of the old support around 111.00 being tested. A move above would complete a small base pattern and imply around 80 pips of upside and a recovery towards 112.00. The hourly momentum indicators could be signals as a move above 60 consistently on RSI and above neutral on MACD lines would signal improvement. Key support is now at 110.20.
Gold
Although initial corrective pressure was contained yesterday the market has again rolled over this morning and is eyeing a test of the five week uptrend. For now the market is consolidating, but a close below $1331 would form a small top pattern (implying $13 of correction) in addition to closing below the uptrend for the first time. This could then usher in a bigger correction back towards the key long term pivot support at $1300/$1310. The momentum indicators are still strongly configured but also show signs of fatigue. The hourly chart shows a disappointing early move lower in the Asian session for the bulls and hourly momentum indicators with far less strength now. The band of support from early January comes in between $1305/$1325, whilst resistance around $1344 is growing.
WTI Oil
Having posted a negative candle yesterday, it is important now to see how the bulls react today. There has not been two successive negative sessions on WTI oil since mid-December, and trading of the past few weeks suggests that the bulls have seen corrections as a chance to buy. However, this has not happened with the RSI around 78 before, so after such a strong bull trend, will traders start to think about taking some profits? The support of Friday’s reaction low at $63.10 will be a key gauge near term. The hourly chart also shows the market at a crossroads, with the support of the rising 89 hour moving average having been breached for the first time since 19th December. If the hourly RSI fell below 30 this would be a sign of potential correction building, whilst the hourly MACD lines have already deteriorated below neutral to their lowest in a month. The resistance at $64.90 will now be watched too as a key reference for the bulls.
Calling for a correction on a bull run as strong as the one on the Dow is a very risky game. However the technical indicators are looking incredibly stretched near term and the potential for a near term reversal is elevating. Upside gaps have become commonplace on the Dow but the latest one looked to be something of an exhaustion move as yesterday’s opening gap was closed on the session. It was also interesting to see the market closing back around the Bollinger Bands (upper band at 25,777) having been way outside earlier in the session. The RSI hit around 88 earlier in the session which was similar to a level hit in October and is equally the largest in the history of the Reuters chart. The market posted a bearish candle across the session yesterday (close below the open) and has now left resistance at 26,086. The room for a corrective slip is there (with the support of a seven week uptrend around 25,215 today) but in the least, this looks to be the opening move for a consolidation. Having said that, this bull run has been utterly incredible and these signals ideally need further confirmation. Another bear session today would add to this sense of correction.
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