Market Overview
After a strong reaction higher on Treasury yields and the US dollar in the wake of Janet Yellen’s hawkish lean in her Congressional testimony on Tuesday, there was a degree of profit taking yesterday which has just pulled the reins slightly on the dollar bulls, but there are questions over whether it will continue. With strong readings on US inflation, with the CPI increasing on both headline and core yesterday, in addition to strong retail sales data, this profit taking is likely to just be a near term correction. Despite this though the charts show the Trade Weighted Dollar unwinding from 101.75 to below 101 (which was a near term breakout), whilst Treasury yields show corrective moves on both the 2 year and 10 year yields. This move has not managed to deter equities though, with Wall Street again pushing into new high territory (S&P 500 up +0.5% at 1249), whilst Asian equities were mostly higher despite the Nikkei closing down -0.5% on a yen recovery. European markets have opened mixed to marginally lower in early moves, although ex-divdends from Royal Dutch Shell (LON:RDSa) and BP (LON:BP) are a big factor in this.
In forex markets there is a mild dollar corrective move still in play, however it is interesting to see the Australian dollar underperforming after the Australian unemployment which showed a mixed picture. The headline rate fell back to 5.7% (+5.8% expected), however, this was tempered slightly by a drop in the participation rate as full time employment fell by 45,000 jobs. Gold and silver are mixed today, whilst oil is mildly lower as the market continues to trade sideways on mixed news over OPEC cuts and the surprise increase in EIA oil inventories.
There is little on the economic calendar to impact the European session, so traders will be looking towards US Building Permits at 1330GMT which are expected to improve marginally to 1.23m (from 1.21m), whilst the Housing Starts are expected to stay at 1.23m. The Philly Fed manufacturing index at 1330GMT is expected to stay in positive territory but dip back to 18.5 (from 23.6).
Chart of the Day – DAX Xetra
The market has been rallying since the middle of last week and the move has just ridden its first bump in the road, and whilst the bears tried to pull the market lower, the reaction was still positive from the bulls. This now suggests that the bulls are still in a position to push on once more. The daily momentum indicators have been corrective but are now ready to turn far more positive again. The RSI is back above 60, whilst the Stochastics are rising strongly, however the confirmation comes with the MACD lines that are ready to complete a bull cross as this is coming. The hourly chart may show a broken uptrend from the past week, but more interesting is that the intraday corrective move unwound to find support right at the breakout support band 11,700/11,724 before rallying again. The hourly momentum indicators have unwound to renew upside potential and the bulls have filled the opening gap at 11,770. The resistance of yesterday’s initial high comes back in at 11,848 which now protects a move back towards the key high at 11,893. The only caveat is that the market closed below yesterday’s open and potentially formed a “hanging man” candle, but this would be aborted by a move back above 11848 today.
The profit taking on the long dollar positions has brought about a turnaround in sentiment on EUR/USD. A bull hammer candlestick pattern formed yesterday after early intraday weakness hit a low at $1.0520 and rebounded into the close. This broke a sequence of bear candles and the continued recovery overnight suggests that the bulls are looking now at a near term bounce. The move has broken the downtrend that had formed over the past couple of weeks, whilst also seeing an improvement on the momentum indicators. The Stochastics have crossed higher and look set to signal a recovery. However the question is, how far can this recovery go before again coming under selling pressure? The hourly chart reflects the improvement, however the initial resistance at $1.0635 needs to be breached. The main resistance on the near term chart is $1.0710 which is the old pivot that could be tested again if $1.0633 is breached. I would expect the bulls to struggle though and see rallies as a chance to sell still.
The pressure is mounting on the support around $1.2430. The medium term pivot has been under strain over the past couple of weeks and was yesterday breached again only for a late rally from $1.2380 to prevent a close back below it. However the rally has done little to improve the outlook, merely looking to be a delay to the eventual breakdown. The momentum indicators remain corrective with the MACD lines having crossed lower and falling, the Stochastics also falling. The hourly chart shows how the market has rebounded back through a nearer term pivot around $1.2470, but there is still a sense that this is a move that has simply unwound the hourly momentum and will help to renew downside potential. With the near to medium term bias with a negative slant now, rallies will be seen more as a chance to sell. The overhead resistance is also growing, with a lower high now at $1.2550 under the $1.2580 high. A close below $1.2430 has still not been seen since mid-January and would be the confirmation of a breakdown, which would open $1.2345 and then $1.2250.
The bulls have just lost a bit of impetus in the rally as the market pulled back from yesterday’s high at 114.95 to close slightly lower on the day. The overnight weaker dollar has continued this little corrective move and has just tempered what looked to be a developing rally. For now the momentum indicators remain configured for the near term recovery but the sensitive Stochastics are already just losing some momentum slightly. The hourly chart is though still encouraging as although there has been a drop back below the pivot at 114.00, there is a sequence of higher lows that remains intact whilst the support at 113.20 holds, and the momentum indicators have simply unwound back to an area where the bulls have tended to recover control in recent days. Watch out for the hourly RSI dropping below 30 to suggest that there is a deeper correction, whilst the support at 113.20 is also important today, with the bulls having lost control below 112.85. For now this is just a corrective move within the recovery but the bulls need to support today.
Gold
Yet another intraday test of the support at $1220 was rebuffed yesterday as the price rallied off $1216.40 to closer higher on the day for a second straight session. The willingness of the gold bulls to remain supportive in the face of the dollar strength has been remarkable and it will be interesting to see if there can be a continuation of a move higher today. This would be after the formation of what could be described as a bull candle. The momentum indicators remain positively configured with the RSI above 60, but the Stochastics settling just under 80 and MACD lines flattening suggests that there is a degree of consolidation now. The hourly chart shows how yesterday’s recovery has improved the near term outlook which had been bearishly biased, however, can this improvement be sustainable. The bulls will be eyeing $1237 resistance today, which protects the $1244 key high. The price action along with momentum indicator configuration has more of a neutral set up.
WTI Oil
The weekly oil inventories tend to drive mid-week volatility on oil and higher than expected inventory builds across the crude, distillates and also this week the gasoline stocks was negative for oil yesterday and kept a lid on any prospective bull move. The big inventory build has settled the market down if anything and a couple of mild positive candles have formed over the past two sessions. Momentum indicators on the daily chart continue to plateau with the daily RSI stuck between 45/60 (so a very slight bull bias) and MACD lines plateauing just above neutral (again a very slight bull bias). There seems to be little drive for any real direction still as the range continues below $55.25 key resistance, whilst time and time again, any move above $54.00 has been sold into as traders seem unwilling to push the market higher. The hourly chart shows the support band $52.75/$52.90 is preventing a retreat to $52.00/$52.20 near term. Even the hourly indicators are increasingly neutral indicators though remains extremely neutral. Resistance is with a lower high at $53.70 under the $54.15 recent high.
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