Market Overview
As has been consistently the theme so far this week, markets are looking cautious once more as safer haven plays find a bid. This comes ahead of key meeting today with the ECB set to announce monetary policy and the bi-annual gathering of OPEC. There has been a shift away from the dollar in the past 36 hours as the safer haven plays have started to recover. The main driver has been the yen strengthening as Japanese Prime Minister Abe has announced a delay of over two years for the planned hike in the sales tax. The move comes amid concerns over the strength of the Japanese economy and whether the move would also delay or prevent further easing from the Bank of Japan. It is ECB day but little notable policy action is expected, although there will be a degree of volatility during the press conference. The latest meeting of OPEC is also unlikely to result in little action with Iran still ramping up its supply and members keen to prevent the loss of market share.
Wall Street squeezed out very marginal gains yesterday with the S&P 500 up +0.1%. However Asian markets were mixed to lower with the Nikkei -2.3% on the stronger yen. European markets are cautiously lower in early moves. There is a general risk off theme for the forex markets today with the yen outperforming. The commodity currencies are all weaker too with the Aussie unwinding some of its recent gains after Australian retail sales slightly missed forecasts. There are some marginal mixed moves on commodities with gold and silver mildly higher and oil mildly lower ahead of the OPEC meeting.
Traders will be ready for the ECB policy announcement at 1245BST followed by the ECB press conference at 1330BST. The ADP employment report is at 1315BST and is expected to show a marginal improvement to 175,000 (from 156,000 last month), and was a good signal for Nonfarm Payrolls last month. The Weekly Jobless Claims are at 1330BST and are expected to improve slightly to 270,000 (from 268,000 last week). Aside from today’s OPEC meeting there are also the EIA oil inventories at 1530BST which are expected to show another inventory draw of -3.0m barrels this week.
Chart of the Day – DAX Xetra
Another near term correction seems to have set in. Once more the big Fibonacci retracements of the 8355/12390 bull run have played a key role in providing a pivot for the market. The recent run higher came within a handful of ticks of the 50% Fib level at 10,372 on Tuesday before an intraday correction that completed a bearish engulfing candle (bearish key one day reversal). This negative outlook changing candle was also confirmed by the subsequent weakness and negative candle yesterday. This now suggests that the bulls have lost control and a retracement is likely to be seen. The May low at 9737 is a key level of support but I am increasingly neutral on the DAX now, with the resistance being Tuesday’s high at 10,365. The momentum indicators are reflective of this with the RSI again rolling over around 60, the MACD lines struggling to gain real traction, whilst the Stochastics have crossed lower and are on the brink of another near term sell signal (the last one in April worked very well). There is now a key pivot level to watch around 10,120 which has also been a key turning pint on several occasions throughout 2016, so a move back below here would open the correction for a pullback towards the 61.8% Fib level at 9897, whilst the risk would also be a move back towards the May lows again. The pivot at 10,120 is therefore key near term.
The euro bulls are fighting back again. The run of lower highs and lower lows is now coming under pressure as the bounce from $1.1100 once more comes through. This long term pivot again seems to have done the job with the support holding and the sellers have been unable to make the breakdown. A strong bull candle now means that the near term resistance at $1.1215 is now under threat. This comes as the Stochastics start to show signs of a recovery and the RSI has started to rise again. This means that as the ECB monetary policy announcement approaches the key band of resistance between $1.1215 and $1.1245 is in range. This is the barrier that the bulls need to breach to end the control of the sellers. As yet there has been nothing that has been confirmed in the recovery however the hourly chart shows an improving outlook now. There is minor support now in at $1.1170 which needs to be held to continue the recovery. In front of the ECB, expect some consolidation but then volatility during the press conference at 1330BST.
The bullish medium term recovery outlook has been aborted as a second bearish candle has broken the uptrend in place since early April. The breach of the higher low at $1.4440 now suggests that the bulls have lost control, whilst the RSI closing last night at an 8 week low also suggests that a test of the key May low at $1.4330 could now be seen. The hourly chart has taken on a more negatively configured outlook now and this suggests that rallies could be seen as a chance to sell. The resistance of yesterday’s high at $1.4500 means that whilst this barrier is in place the outlook will remain negative at least for the near term. However as is increasingly clear from the huge turnaround in sentiment on Tuesday, the volatile impact of the Brexit polls will ensure that there is the prospect of some sharp intraday moves that is likely to ensure that the medium term outlook will remain choppy until after the referendum on 23rd June.
The yen is strengthening once more and this is pulling the price back lower again. The move has now left key resistance at 111.43 which seems to be yet another lower key high (under the April high at 111.90) and having broken below the reaction low at 109.08, this means that the four week recovery is now reversing. The corrective momentum is now beginning to gather pace as the Stochastics take a sharp decline, whilst the RSI is also back below 50 and is confirming the move. The next key support to watch is 108.20 as this is the last real previous support that would prevent a full retracement back to the 105.50 lows again. The hourly chart shows a far more negatively configured momentum has taken on now and that rallies will be seen as chance to sell. The chart shows that near term key resistance now lies at 109.50/109.70. The overnight low at 108.85 is initially supportive but a breach today would re-open a test of 108.20.
Gold
The support may have formed this week at $1199.60 but there are still question marks over the potential for a gold rally. The fact that the price has not been able to make decent ground in a recovery (whilst the yen and the euro have both turned higher) is a little disappointing. However whilst the key low at $1190.40 remains intact then there could be a support building. The slightly negative “spinning top” candle yesterday reflects an uncertainty and has added resistance at $1220.30 (underneath the $10 band of resistance between $1223/$1233). Momentum indicators are struggling to gain traction although there is degree of recovery underway. This stunted recovery is also reflected on the hourly chart with support of yesterday’s low in at $1205.50. It looks as though gold is underperforming in a recovery and this would be a concern if the dollar strength were to take hold again. For now this is a building process for gold, it is just that until $1233 is breached there may be little real technical improvement. One final factor to consider is that it is Non-farm Payrolls tomorrow and gold is highly reactive on a historic basis.
WTI Oil
With a second consecutive negative candle the near term correction continues to threaten, without really being able to sustain a move. The slight decline broke near term support at $48.70 which opened the key near term pivot support at $46.75. However, yesterday’s intraday bounce has left minor support now at $47.75 and this could help to protect from a correction today. The sharper uptrend (dating back to mid-April) may have now been breached but the main medium term uptrend comes in today around $45.80 and as yet there is nothing significantly concerning that would suggest this is anything more than a near term pullback within the bull recovery. The RSI has previously been supported on corrections around 55, whilst the late May unwind never really took hold with the RSI unwinding to just 65 before the bulls returned again. The MACD lines remain positive and although the Stochastics are turning lower, until a breach of the mid May low (around 50) is seen then this is likely to be a move that is bought into. The clear volatility event today will be the OPEC meeting and newsflow could be the main driver today, however technical continue to show strong support and corrections being bought into. So far there is little to change this view.
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