Market Overview
Amid positive risk appetite, the strong ISM data as hastened the recent push higher on Treasury yields, whilst a stronger dollar remains on course. The stronger dollar fuelled by renewed prospects of a “Trump Trade” and the potential for a hawkish Kevin Warsh replacing Janet Yellen as FOMC chair, has been helped by stronger US data too. The ISM Manufacturing PMI was the highest reading for 13 years yesterday and reflects the confidence of expected expansion. This has helped to widen the Treasury 2s/10s spread further to 86 basis points (was 79 basis points just over a week ago). This reflects a yield curve steepener that is helping to drive the US Dollar Index back towards a test of its August high at 94.15.
Equity markets are also benefitting from this improved risk appetite, with sharp moves to all-time highs on Wall Street, whilst in Europe the DAX is also homing in on its own all-time high. A weaker gold price tends to come with the territory of improved risk, however the decline in the oil price is the one significant fly in the ointment. As rig counts begin to rise again in the US and reports of increased Iraqi production, the price is back under downside pressure. This has the potential to take the shine off moves on the oil majors. Overnight, the Reserve Bank of Australia held rates steady at 1.50% (no change expected at +1.50%).
Wall Street saw strong gains with the Dow finally breaking all-time highs again, whilst the S&P 500 continues to also grind higher at +0.4% and 2529. The Nikkei was 1% higher, whilst European markets are in consolidation mode early today.
In commodities, the gold price remains unable to hold on to any gains, whilst the recent slide in the oil price is also lower once more.
It could be a rather quiet day for traders, at least in the European session. Today is German Unity Day public holiday so the major economy of the eurozone has its feet up, whilst there is little economic data of any note during the European morning, aside from the UK Construction PMI at 09:30 BST which is expected to fall to 50.8 (from 51.1 last month). However the impact of this data tends to be limited as construction is only around 8% of the UK economy. There is also little real US data of any note in the afternoon.
Chart of the Day – GBP/JPY
The correction that is gathering pace on sterling has completed a reversal pattern now on Sterling/Yen. The market has been threatening to top out over the past couple of weeks once the rally hit the skids at a high of 152.85. However the corrective pressure built through yesterday’s decisively bearish candle has now made a key breach to lose below the reaction low at 149.75 to start a trend of lower highs (at 151.60) and lower lows. The daily momentum indicators confirm the topping out and the beginning of a retracement move. The RSI is now tracking back below 60, whilst the Stochastics are beginning to confirm a near term sell signal and the MACD lines are also crossing negatively.
The move now opens for a retreat to the key 148.10 breakout. The unwinding move still looks to be simply a near term pullback towards a key breakout support and the medium term bulls will certainly be interested again if support can begin to form between 146.80/148.10. However for now the near term slide is running. The hourly chart shows that this topping out is actually a 12 day head and shoulders top pattern with around 270 pips of corrective implied target. That would take the market to 147.40 and bang in the middle of the medium term breakout support. The hourly chart shows that today’s early rebound could be an opportunity to sell into the initial resistance at 149.75/150.10, whilst any unwind into 50/60 on the hourly RSI tends to now fail. The top aborts above 151.60 resistance.
The relative dollar strength continues to drag EUR/USD lower and with yesterday’s decisive bear candle the market has pulled back below the reaction low at $1.1715 for a new six week low. The bears are now on course for a test of the key support of the August low at $1.1660. The risk is that this support will come under significant scrutiny as the momentum indicators are now in decisive correction mode. The RSI has dropped below 40 and is the lowest since February, whilst the MACD lines are once more accelerating lower and the Stochastics are falling below 20. Intraday rallies are a chance to sell. The hourly chart shows the breakdown at $1.1715 is an initial barrier whilst a further minor reaction high at $1.1765 adds to resistance before Friday’s high at $1.1830. The downside target of $1.1550 from the head and shoulders top pattern remains a distinct possibility if the support at $1.1660 is breached.
The correction from the top pattern completed below $1.3450 implied $1.3250 and this target has now been achieved. However the momentum in the downside move continues to accelerate, with the RSI below 50, the MACD lines racing lower and the Stochastics also in decline. Yesterday’s strong bear candle which cut 120 pips off the price has quickly now put Cable back in the medium term support band $1.3050/$1.3250. This is an area in which the medium term bulls will be looking for a renewed buying opportunity as this still looks, for now, to be a correction within the medium term trend higher. However, there are no signs of exhaustion quite yet as the corrective move continues. The hourly chart shows overhead resistance now between $1.3350/$1.3450 and that near term unwinding moves are still a chance to sell. The 50% Fibonacci retracement of the Brexit sell-off is at $1.3247, whilst the next minor reaction low is at $1.3160.
There is a trend higher on Dollar/Yen and the market is looking to push higher. However the bulls are finding the going a little more tough than a couple of weeks ago. There is a run of higher lows with which Friday’s low at 112.20 would now be added to, but a last night’s close again failed to decisively push through 112.70. Momentum indicators are positively configured with RSI above 60, Stochastics above 80 and MACD lines rising, but the conviction in the MACD lines is beginning to wane. The moves in the early Asian session today have been strong and there has been a renewed move above 112.70, so the bulls will be eyeing 113.35 resistance again. A decisive close above 113.25 would help to renew some impetus for the run towards 114.50. The hourly chart shows 112.50/112.70 as a basis of support now.
The trend channel continues to run lower as the negative candles rack up. Another decisive bear candle has closed decisively below initial support of $1277 as the market drops back to test the next reaction low within the previous uptrend at $1267. The continued negative momentum that has built up over recent weeks does not suggest that the market is slowing in its decline either. The MACD lines are now decisively falling, back under neutral, with the RSI below 40 and the lowest since July (when the previous uptrend formed), whilst the Stochastics are extremely negative. Intraday rallies are a chance to sell, with $1277 now a basis of near term resistance. The lower highs are building up now with $1290 coming in below the long term pivot band $1300/$1310. What is building into a near to medium term trend lower comes in at $1294 today. Under $1267 the support is at $1251 and then $1243.
WTI Oil
The positive momentum has been decisively lost as the market has moved into sharp reverse. A strong bear candle form yesterday has not only broken the four week uptrend but also broken the support of the key $50.50 breakout. Despite marginally failing to close below $50.50 yesterday, this level will be watched as the sellers still seem to be in the market. This is a significant blow for the bulls who will now also be watching the support at $49.20 with added interest. With the momentum indicators moving into reverse now, the outlook has sharply deteriorated. The bulls need to prevent this from turning increasingly negative by holding on to $49.20 as a breach would be a first real reaction low within the trend higher and confirm the sellers were gathering momentum. This would also come with the RSI below 50 and Stochastics below 60. Hanging on to the support at $50.50 would help to restore some confidence, but Monday’s high at $51.70 is now growing as resistance.
Having been building momentum in the past couple of sessions, the Dow has now pushed decisively into all-time high ground once more as the buyers wasted little time in pushing for a breach of 22,420 yesterday. This now opens the way back towards the implied rage upside target of 22,675. The positive candles are racking up once more and the bulls are back decisively in the driving seat. The RSI is positively configured and strong moving above 70, whilst the Stochastics are also positively positioned. The hourly chart shows a near term breakout support 22,395/22,420 with further support a little further back at Friday’s low of 22,333. The key medium term support is bolstered now at 22,219 above the 22,179 medium term breakout.
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