10/03/2015: Dollar bulls quickly back in control as equities look to settle

Market Overview

After a day of reflection with little economic data to worry about, markets have begun to calm down a bit from the impact of the Non-farm Payrolls report. However it seems as though the strong dollar position remains as many of the dead cat bounces that had threatened during the early part of the day have begun to peter out. Rallies on the euro and gold briefly threatened but ended up as a damp squib. Whilst only sterling could hold on to any real ground, even then the rebound seems to have run out of steam today. However equity markets may be making a better fist of the rebound with Wall Street on a decent bounce with the S&P 500 0.4% higher. With the VIX volatility index starting to show signs of upside again (generally seen as negative for stocks) it will be interesting to watch the equity markets this week.

Overnight Chinese CPI surprised to the upside posting +1.4% year on year versus an expected +0.9%, however it was noticeable that PPI (ie. factory gate inflation) fell more than the expected to -4.8% (-4.3% had been expected), so it appears that producers continue to suffer. The reaction has been for Asian markets to trade mixed (Aussie ASX and Shanghai “B”) to slightly lower (Nikkkei 225 down 0.6%). European markets have opened mixed to slightly lower.

In forex trading, the dollar is back as the dominant force amongst all the major currencies again today, with strong gains for the greenback on all pairs. Key levels are increasingly being tested and broken with Dollar/Yen breaking to new multi-year highs overnight and the Aussie also testing key support at 0.7623.

Again there is not much for traders to get their teeth into today on the economic calendar. With Chinese inflation out the way there is only really the US JOLTS job openings at 1400GMT. Be careful as the US data is all an hour earlier following the daylight saving time shift on Sunday. The JOLTS are expected to continue to improve impressively to 5.04m (from 5.03m).

Chart of the Day – Silver

The breakdown in gold is a key factor in the precious metals space, but silver is also under significant pressure. A sequence of six consecutive days of losses has continued the 6 week downtrend which is dragging the price lower to test the key support in place t $15.49. The problem is that with the RSI already at a 4 month low as momentum indicators take on a strongly negative configuration, the outlook is under increasing pressure. The downtrend would suggest that any near term bounce should be seen as a chance to sell. The downtrend today comes in around $16.30. A breach of $15.49 would re-open the spike low at $14.42. It would need a rebound above the reaction high at $16.88 to suggest that the bulls were seriously fighting back.

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The euro weakness shows little sign of abating as the rate has now dipped back to $1.0792 which is the 50% Fibonacci projection of the $1.2569/$1.1098 sell off measured from $1.1532. If we now begin to see the euro trading clean below this level it would open $1.0617 which is the 61.8% Fibonacci level. Momentum indicators remain very strongly bearish and if anything are getting worse, with RSI and Stochastics continuing to decline and MACD lines falling away. The RSI is now around 20 which is clearly becoming extreme, even though previous sell-offs (January 2015 and September 2014) both got to around 17 before the support started to form. There is little respite either from the hourly chart which shows negative configuration on the momentum as the MACD lines have also just turned lower again. Also the price has just broken to another new multi-year low overnight to confirm yesterday’s high at $1.0906 as the resistance now. There is further resistance at $1.0988.

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Cable had a decent reaction yesterday as it bounced above the support band in place between $1.4950 and $1.5000, however for now it appears to be little more than a bear market rally as the move retraced just over half the sell-off on Friday. The daily momentum indicators are increasingly negative and the rally seems to have formed resistance around the $1.5135 old support level. I would be looking upon anything back into the $1.5100/$1.5200 range as a chance to sell now. The hourly chart shows that momentum has just unwound from oversold and the bears look ready to take control again for further pressure on the lows once more. It would need a confirmed break above $1.5200  to even think about a sustainable recovery once more.

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The bulls really have got full control now as another positive candle from yesterday has been furthered by strong gains overnight which have seen the pair storming to a new high dating back to July 2007. This now means that there is little real resistance until 123.66 and ultimately the key high at 124.16. Furthermore, I like the way this bull run is developing as it has been slow and steady, meaning that the momentum is positive with further upside potential. The RSI is just at 69 currently and the bull runs of September and November both had entire months with the RSI above 70. So there is certainly still potential for this bull run to continue. The key support has been left at 119.40 but also there are minor levels back at 120.60 and also a breakout level at 121.30. Hourly momentum looks positive across the board.

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Anyone who is a medium/long term gold bull should look away now. The breach of the key January support at $1168.25 has been confirmed with a two day closing breach and it does not seem as though the selling pressure is stopping there. Now that support has been cleared out the way this re-opens the critical $1131.85 low which isa multi-year low dating back to April 2010. The momentum indicators look increasingly concerning also with a recent bearish kiss on the MACD lines and both Stochastics and RSI in full negative configuration. The overnight price action has also done little to suggest there is any appetite for any real buying as the bears have pushed the price back below the previous day’s low. There is resistance now in place from yesterday’s dead cat bounce high at $1175.40, whilst the old critical floor t $1180.70 is also still viable. Using any rebound as a chance to sell remains my preferred strategy.

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The daily chart shows that the range play continues and there is little appetite from either bulls or bears to break the range. The daily RSI and MACD are almost entirely neutral whilst the 21 and 55 day moving averages are flattening off. Looking at the intraday hourly chart, once again in the past couple of days the Fibonacci retracement levels of the $54.24/$47.36 range continue to play a role on intraday moves. The 23.6% Fib level at $48.99 held the Friday sell-off, whilst 50% at $50.80 capped the subsequent rebound. Once again the hourly RSI has come in to act as a chance to play the classic oversold/overbought extremes (to buy around 30 and sell around 70). Moving averages are increasingly mixed and showing little concept of direction that would suggest any serious pressure towards the range high/low.

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