Market Overview
The market reaction to what is increasingly likely to be a failure of the Republicans to get through new healthcare legislation could be key to the near to medium term outlook for sentiment. There has already been a shift into safe haven assets in recent days and this could accelerate if there is a negative reaction. If Trump cannot get through changes to the Affordable Care Act then how is he going to get though sweeping taxation and spending plans that he has promised and the market has so hoped for? However, there has been an interesting move forming, with Treasury yields pushing higher and the dollar rebounding, with the positive correlation between yields and the dollar continuing. This is impacting across forex markets and commodities, whilst equities are also looking more stable. However, is this dollar rally just a minor blip in what could turn out to be a deeper unwinding correction of the “Trump trade”? We will know a lot more after the confirmation of the destiny of the healthcare legislation.
Wall Street closed marginally lower with the S&P 500 -0.1% at 2346. Moves in Asian markets were mixed to positive with the Nikkei +0.9%, whilst European markets are also marginally higher in early moves. Forex majors show the dollar to be outperforming across the board today with sterling and the yen suffering. Gold and silver are mixed but if the dollar strength continues, they will be under pressure. Oil has bounced early today but is it just continuing a trend of recent sessions where initial positivity is sold into the close?
The economic data impacting on markets today comes in the form of the flash PMIs and the durable goods orders. European countries come through initially with their flash PMIs for manufacturing and services early in the European session, with the Eurozone flash Manufacturing PMI at 0900GMT which is expected to dip very slightly to 55.3 (down from 55.4 last month) along with the Eurozone flash Services PMI which is expected to also dip slightly to 55.4 (from 55.5 last month). Completing a heavy week of FOMC speakers, Chicago Fed President Charles Evans at 1200GMT, who has been historically a dove on the committee but is a recent advocate of three hikes this year. The US data begins at 1230GMT with the Durable Goods Orders which are expected to show the core data (ex transport) expected to rise by +0.5% on the month. The US flash Manufacturing PMI is at 1445GMT which is expected to improve to 54.9 (from 54.2 last month), with the US flash Services PMI is expected to tick mildly higher to 53.9 (from 53.8).
Chart of the Day – EUR/JPY
The market has become corrective in the past week and yesterday’s break below the support of the key near term reaction low around 120.00 now opens a full retracement to 118.20 again. The momentum indicators have turned decisively corrective now with the MACD lines crossing lower, the RSI falling back towards 40 whilst the Stochastics are in sharp bear territory now. The hourly chart shows a succession of lower highs and bearishly configured hourly momentum with the hourly RSI and MACD lines below neutral. The initial resistance of the previous support at 120.00 has also become a near term barrier to recovery. Near term rallies are now being seen as a chance to sell, with a further band of resistance at 120.30/120.60. With hourly momentum unwinding back to levels where the bears have been taking control recently, expect a retest of yesterday’s low at 119.30 which is initially supportive but below that there is little support until the key medium term support at 118.20.
The corrective drift back following a strong bull candle on euro seems to be once more underway as another mildly negative candle was formed yesterday. With a similar looking dip early in today’s session the bulls will now be looking to make a decision. The key reaction low they need to mind is the support of Tuesday’s low at $1.0717 (just above the old pivot at $1.0710), as a breach would end the sequence of higher lows and suggest the trend was rolling over. The momentum indicators are still positively configured but are just mildly ticking lower, with the RSI back below 60. Watching the hourly chart could give a clue as to the bullish potential for this correction, as the hourly RSI has held above 30 consistently during the corrective moves recently only for the bulls to come in and support. The resistance is on a sliding basis on the hourly chart with $1.0795/$1.0805 to be watched, and $1.0825 near term key. The long term resistance band remains $1.0800/$1.0850.
The rally over the past week and a half has moved from $1.2105 over 400 pips higher to $1.2530. During that rally the market has consistently posted a string of higher day lows, with yesterday’s low at $1.2460. So the bulls will be looking for signals to suggest the move has run its course, and a breach of yesterday’s low could be considered to be an early warning at least. The market has been ranging for several months now and the resistance under previous highs of $1.2570/$1.2582 will come as a disappointment. Today’s early move is lower and this is starting to impact on the Stochastics which are rolling over and the RSI which is back below 60. The hourly chart shows the early decline is breaking below the support of a nine day uptrend but for now the hourly momentum suggests it is just unwinding strong bull momentum. The hourly RSI below 30 would be a signal, as would the MACD lines consistently below neutral. Breaching support at $1.2420 would confirm the loss of bull momentum in the run higher.
After a run of eight bearish candles that have incorporated the loss of the key support at 111.60, the dollar is threatening a near term recovery. Yesterday’s session unsuccessfully tested the resistance of the old floor at 111.60 only to close back below 111.00. However an early rebound today is again shaping to test the resistance which has been pivotal throughout this week. If the market were to close above 111.60 tonight it would be a signal for a near term rebound. This comes as the daily Stochastics and RSI are beginning to tick higher this morning. The hourly chart shows that a move above 111.60 would imply a 100 pip recovery target (measured from yesterday’s low at 110.60 and this would put another important near term old support turned new resistance at 112.50 under scrutiny. The potential for a retracement rally after the eight days of decline is growing, however whether it is a sustainable move remains to be seen. Key resistance is also overhead at 113.55 and I remain a seller into strength.
Gold
The improvement in the dollar is also being reflected in the mild drop back in the gold price today. The market posted a high in yesterday’s session of $1253.10 before closing down on the day for the first negative candle in seven sessions. The early continuation of this dip lower today means that support will now be eyed for whether this is just a blip within the move higher or a deeper retracement move. The Stochastics are rolling over above 80 so the potential is there for a near term sell signal. For a few days now I have been talking about the near term support at $1242.50 and $1235.50. The first support is being tested this morning and a breach of the $1235.50 support would suggest the bulls have run out of steam. It would then be the $1226.30 support that determines whether this turns into a deep correction again. Hourly momentum is coming back towards key levels with the hourly RSI not having been below 30 during this run higher, whilst the MACD lines are already back around neutral. If the buyers come in between $1235.50/$1242.50 then the upside potential would be for a retest of $1253.10 and further moves towards $1263.80. It could be an important day for the near term outlook.
WTI Oil
Oil remains under pressure with yet another bearish candlestick formation, with the twelfth bearish candle in the last thirteen sessions. That would suggest that any early positivity continues to be overwhelmed by the bears later in the session. The market is one more showing early gains today. The daily momentum indicators are negatively configured and rallies are seen as a chance to sell. With the market closing towards the low of the day yesterday, the resistance is in place at $48.50 (yesterday’s high) which could now be another lower high below the interim reaction high at $48.75. Support is initially at $47.60 but the market continues to be bearishly configured on the hourly chart for a test of the low at $47.00.
The market took a change of outlook on a move below the support at 20,777 which completed a small top pattern that continues to imply a minimum target of 223 ticks of correction (towards 20,555). With the momentum indicators in corrective configuration rallies will now be seen as a chance to lighten medium term longs or place near term short positions as part of a bull market correction. The old support at 20,777 now becomes the basis of new resistance, with yesterday’s failed intraday rally a concern for the bulls. The Stochastics continue to fall in bearish territory whilst MACD lines continue to also slide. The hourly chart shows with momentum indicators correctively configured whilst there is a band of overhead supply between 20,777/20,900. Thursday’s low at 20,579 is initial support now, but the concern must be that there is little real support until 20,125 and if the correction gathers momentum the dip could run away.
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