Market Overview
There has been a mixed read through from the Federal Reserve monetary policy decision yesterday. The FOMC is still accommodative but remains cautious in its outlook for recovery. Looser monetary policy for longer will ultimately support markets and underpin the risk recovery, with rates not rising until at least 2022, whilst asset purchases will continue to run for several months. Initially markets took this as a risk positive, however, the positive mood has quickly dissipated. The Fed is rightfully downbeat on the economic recovery. The road to a V-shaped recovery may not be as smooth as hoped for. Concerns over localised evidence of increasing COVID-19 infection rates in Texas reflect this and have seen the risk recovery roll over this morning. Suddenly today, we see safety first. The oil price is over -3% lower, whilst the dollar and the yen are performing well through major forex. Equities are sharply lower as US futures move into retreat. There is plenty of opportunity to take profits on what has been an incredibly impressive risk recovery and it seems that this morning, this move is kicking in. This move is overdue and is likely to end up being the source of the next opportunity to buy again. For now though, a correction is forming.
Wall Street closed around the lows of the session yesterday with the S&P 500 -0.5% at 3190, whilst futures show this move continuing (E-mini S&Ps -1.3%). Asian markets sold off, with the Nikkei -2.8% and Shanghai Composite -0.8%. European markets are sharply lower in early moves, with DAX futures -2.1% and FTSE futures -1.7%. Forex majors take a risk negative tone, with JPY and CHF outperforming, whilst USD is also strong. AUD, NZD and GBP are moving into reverse. In commodities, oil is around -3% lower, whilst silver is also -2% off. Gold is holding up relatively well still after posting a third consecutive positive close yesterday.
There is another US focus for the economic calendar today. May Factory gate inflation is first up with the US PPI at 1330BST. Headline PPI is expected to continue to remain deep in negative territory, at -1.2% (-1.2% in April), whilst core PPI is expected to drop slightly to +0.4% (from +0.6% in April). The US Weekly Jobless Claims have been steadily falling over recent weeks, but remain hugely elevated, with claims expected to be at 1.550m (1.877m last week).
Chart of the Day – German DAX
We have spent the early part of this week questioning the continuation of the risk rally across major markets. The DAX has been an impressive bull market outperformer in recent weeks, with the move going almost relentlessly higher. However, the signs of profit-taking (or should that be near term correction) have been growing this week. Closing yesterday’s session before the FOMC meeting, there have been two consecutive negative candles. Additionally, they were decisive bearish candlesticks, with failures of initial attempts to move higher. The move has left an important resistance band between 12,885 (old key support from December) and Monday’s high of 12,913. Futures are calling for sharp losses early today and waning daily momentum could {{0|now}} be set for corrective signals if confirmed, with an RSI cross below 70 and Stochastics crossing lower (close to a confirmed sell signal). However, it is on the hourly chart where corrective concerns grow. The first week of May shows negative divergences on hourly RSI throughout the run higher. Hourly MACD lines are {{0|now}} at three week lows, whilst the market is {{0|now}} beginning to post lower highs at 12,765 and 12,665. The daily chart the support of a four week uptrend comes in around 12,370 and looks to be breaching today. However, a closing breach of support at 12,325 (as an important higher low) would put the market into reversal mode. There is little real support until 11,575/11,825 and a near term retreat towards here is a growing possibility.
As the bull run on EUR/USD has stuttered in recent sessions, there has been a mix of technical signals forming. An initial breach of a sharp uptrend saw a strong bull reaction to move to new multi-month highs yesterday. However, despite a significant dovish steer from the FOMC yesterday, there has been a lack of follow through momentum for the bull run. In fact the pair has retreated again this morning. We redraw the three week uptrend to a shallower trajectory, but this morning’s pullback is {{0|now}} testing that too. This lack of recent conviction is beginning to weigh on daily momentum indicators There is nothing decisive yet, and signals are still in their strong positive configuration, but RSI is waning once more and MACD histogram bars are reducing (indicating waning momentum). The rising 144 hour moving average (around $1.1340) of the hourly chart has been a good gauge for the deeper intraday corrections in the past couple of weeks. Hourly momentum is also showing far less conviction too. There is a near term pivot at $1.1320 which has become supportive in the past couple of days and is an initial gauge. Key resistance (post the Fed) is $1.1420 which is {{0|now}} a barrier in front of $1.1490.
Is a correction finally brewing on Cable? The run higher has been impressive over the past two weeks, with ten positive closes in a row. However, we have been increasingly concerned over the small real candlestick bodies which point to a lack of conviction. This is especially the case in the past couple of sessions. It is notable that this is coming with the 14 day RSI bumping up against 70. With a bull failure around $1.2810 in the wake of the FOMC meeting yesterday, Cable has pulled sharply lower overnight. The recent trend higher is {{0|now}} being tested on the daily chart. On the hourly chart the situation looks more corrective, with the uptrend breaking. Furthermore, hourly moving averages are falling over and are closing in on “death crosses”, whilst hourly MACD lines show an ongoing negative divergence with price highs of the past week. The key will be how the market reacts to support in the band $1.2615/$1.2645. The key breakout of $1.2645 (old April highs) leaves this as underlying demand and a closing breach would be a concern. However, on the hourly chart we see $1.2615 has been a key pivot support in the past week and a breach would be a confirmed change in outlook. We would then look towards the next support at $1.2500. The bulls need to reclaim $1.2750 to get their run back on track.
With three decisive negative candlesticks in a row, Dollar/Yen has been dragged quickly back to support around 107.00 once more. Back in April, 107.00 was a basis of support and was again a gauge in May. With the FOMC negative for Treasury yields (there is still a strong correlation between 10 year yield spreads and Dollar/Yen) we see USD/JPY dragged lower back towards 107.00 (the late May spike low to 107.05 adds to tis basis of support around 107.00). There is a degree of settling down this morning, but the near term outlook remains negative in the wake of these last three bear candles. However, taking a step back, the market looks ranging still. The near term swing lower on momentum indicators looks to be an unwinding move, rather than anything more sharply negative. If the market begins to settle {{0|now}} today, it will play into this ranging outlook. Hourly indicators show the 21 hour moving average has been a good gauge throughout the recent decline, and hourly momentum remains a struggle for recovery. Resistance at 107.45 was the post Fed high and will be a gauge for any near term recovery {{0|now}}. Given the negative bias still in near term moves, a breach of 106.90 (the overnight lows) would open 106.00 range support.
The near term outlook for gold has improved in the wake of the Fed, but still lacks conviction. The initial move was gold positive last night (more accommodative monetary policy stance from the Fed is negative for yields and the dollar and is supportive for gold). This has pulled gold through the mid-range resistance band of $1700/$1725 and completed a third consecutive positive candle. However the run higher has slipped away this morning as a retracement has kicked in. This is leaving resistance at $1740 and pulling gold back towards $1725 again. The question is, whether this is another lower high, under the previous levels of $1754 and $1746. The hourly chart shows how reaction around the near term breakout of $1720/$1725 could be important to determining the near term outlook, which is edging towards a more positive bias again in the wake of the Fed. It is also important to point out that this all continues to play out within the medium term trading range $1660/$1764, within which the market rarely tends to deviate for long away from the mid-range $1700/$1725 area.
It is a remarkable feature of this hugely impressive recovery on oil, that whenever the bulls take a step back, they can still repel the corrective forces. Twice during May there were week-long periods where the bull run faltered and was threatened with correction. However, on both occasions, support held firm only for the recovery uptrend to hold, a range breaking out once more to the upside and the next leg of the rally to kick in. So this week, as oil has slipped back from Monday’s high of $43.40, a near term correction has threatened again. So far, the bulls have fought hard on Tuesday and Wednesday to leave positive candlesticks despite initial weakness. The market is again trading lower initially today and is {{0|now}} testing the uptrend around $40.00. Momentum indicators remain in medium term strong configuration but are ticking lower initially. With price support at $39.85 this week and the uptrend supportive today, this is the point at which the bulls will be looking to kick in again. The hourly chart shows that this is again an inflection point. Below $38.75 support would form a near term reversal and bring the $33.55/$36.40 breakout support back into play. Resistance at $42.00 initially.
A second consecutive negative close I a rare event at the moment, so needs to be taken notice of. Furthermore, coming in the wake of a dovish FOMC announcement, a fall back in the Dow becomes even more interesting, especially with futures falling again today. Technically, this is {{0|now}} an important moment, and if futures are anything to go by, then support of the four week uptrend (around 27,000 today) will come under considerable pressure today. The first important gauge will then be 26,835 which was the traded low following Thursday’s gap higher. If the market gaps below this level today and keeps moving lower, it would leave an “island reversal” where a cluster of candles are left isolated by two separate gaps. This can be a significant trend change indicator and would raise the significant possibility of a retracement of the bull run. Closing that gap at 26,385 would then be the next gauge. There is little real support until 25,030/25,760. The reversal in the past couple of days has left key resistance {{0|now}} at 27,580.
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