There is a sense of a slight hangover for the dollar on Monday morning after the Non-farm Payrolls report induced such a strong run on Friday. It is interesting to see the euro, Cable and gold all bouncing slightly early today. There is often a view that there can be a “dead cat bounce” after such a strong move and this could just be that. Markets need to slightly re-calibrate and it might be a case of that today. The dollar is certainly moving with economic data (strong payrolls was strong for the dollar), whilst this strong dollar has also been negative for precious metals and other commodities. Furthermore, equity markets have taken a bit of a shock from this news. The sharp negative reaction on Wall Street on Friday suggested that the market was concerned over the prospect of an earlier Federal Reserve rate hike. The S&P 500 closed 1.4% lower and this has had a knock on impact with Asian markets today broadly lower with the Nikkei off 1.0%. European markets are trading lower today in early exchanges too.
The forex markets are still coming to terms with Friday’s strong Payrolls report and the dust is still settling on the dollar’s gains. There is very little economic data to trouble traders today so the market will be trading on the legacy of the payrolls report. It will be interesting to see if this has drastically changed the perception of the market.
Chart of the Day – S&P 500
The S&P 500 has now completed a near term top pattern that suggests there is the potential for a further correction in the coming days. Friday’s close below 2085 confirmed a small head and shoulders top pattern which gives an implied downside target of 2043, which coincides with a reaction low from February. The momentum indicators are interesting as they have all turned over and are looking corrective now. The MACD lines have formed a bearish crossover and the Stochastics have a confirmed sell signal. For now this pattern looks to be more of a correction within the uptrend, with the 144 day moving average (around 2019) a good basis of support for the bigger corrections. The intraday hourly chart shows that the 2085 neckline now becomes a basis of resistance near term for any minor pullbacks. However the prospect of a near term correction is high.
The strong dollar continues to put pressure on the euro and pull the pair lower. The outlook remains extremely weak with a move towards the next Fibonacci projection to the downside of $1.0792. However the next price support does not come in until $1.0760 which was a key low back from as long ago as 2003. Across the board, daily technical indicators are bearish however the RSI at 22 is now beginning to look a touch stretched again and this may begin to limit immediate downside potential. During the January sell-off the RSI reached 17 so there is a precedent for further decline however this is still becoming an extreme move, also the 2.0 Standard Deviation Bollinger Band comes in today at $1.0904 so the euro is trading well below that currently. The intraday hourly chart just shows very strongly bearish momentum with an overnight low at $1.0820. The first real resistance does not come in until Friday’s reaction high at $1.0988.
The sell-off on Cable has accelerated with a stronger dollar which has confirmed the shift to bearish control. The decline has quickly now come back for a test of the support band $1.4950 to $1.5000, but it is interesting that the low from Friday and the Asian trading session low is coming around the support of the old 7 month downtrend which is today coming in at $1.5010. Momentum remains negative whilst also showing further downside potential on indicators such as the RSI. The intraday hourly chart shows the rate is simply unwinding an oversold technical position now with the hourly RSI bouncing back. There is little to suggest this is anything more than an oversold technical rally but the resisatnce down not really come in until $1.5200which suggests there is still some room to unwind. Ultimately though the outlook is increasingly weak and further pressure on the lows can be expected.
The dollar bulls are gathering strength now, with Friday’s move above the resistance at 120.82 re-opening the key December high at 121.84. Momentum indicators are really beginning to show improvement as the pair has now broken clear of all its rising moving averages. The hourly chart shows the strength of the dollar that has built in recent sessions with all indicators looking bullish and this now has the look of a very well ordered bull run. In this case look to use any weakness as a chance to buy now with a good 35 pips of support between 120.25/120.60. There is a 7 day uptrend also in place that comes in around 120.10. The key reaction low to hold on to now becomes 119.90.
The daily chart shows a hugely bearish candle that saw around $40 of downside on Friday. This has resulted in the completion of an entire retracement of the January rally back to $1168.25. In fact the low on Friday was $1163.45 before an oversold technical rally has begun to set in with the RSI below 30. It is interesting on the hourly chart as it shows that the downside move was almost entirely due to the Non-farm Payrolls report. However now we are seeing some unwinding of the move. The question would be over how far this rebound could go, already having reclaimed almost $10. The hourly RSI is still unwinding and is back to 40, but the hourly MACD has a way to go still. It is difficult in these situations as it is probably best to let the rally play out before reassessing the situation. The resistance comes in at $1180.70 which is the historic critical floor, whilst the lows from last week were around $1191 prior to the breakdown. There could still be a way to go in this rebound but the bears could still have a further say in due course.
The strong payrolls report resulted in a sell-off on WTI on Friday afternoon amidst a stronger dollar. This has dragged WTI back to breach the recent 6 day uptrend and back towards its pivot level around $49.50. This is the level that I have identified as a point at which I would move from positive within the band towards expecting a retest of the lows. As ever with WTI though it cannot be a binary view of support and there has been a basis of support formed overnight at $49.30 before the buyers have come back in. This suggests that I can hang on to a positive bias within the range for a little whilst longer. The hourly RSI has bounced around 30 which is giving a chance for the bulls to get long around the support once again. Overhead resistance comes in around $50.50. The move in the last trading day has once again proved how difficult it is forecasting WTI during this range as the volatility continues to drive hectic intraday moves. The reality is that aside from buying towards the range low ($47.36) and selling towards the range high ($54.24), trading WTI is going to prove risky.