China PMI still below 50 puts risk appetite under pressure

Market Overview

Kicking off a week jam packed with a whole raft of crucial data releases, in keeping with recent months, China has driven concern into the minds of traders once more. The official manufacturing PMI came in below estimates at the weekend and also below the key 50 point with 49.8. However the impact of this has been slightly reduced by the unofficial Caixin manufacturing PMI for China which came in ahead of expectations, albeit still below 50 at 48.3. The net impact of this China PMI data has been to immediately put risk appetite under pressure and the early moves on equity markets shows a negative open to the trading week. In Asia, Chinese equities were trading lower, whilst the Japanese Nikkei 225 was down 2.1%.

Interestingly though there has not been a great deal of movement or reaction on the forex markets yet. There is a slight move towards the yen safe haven but there is also a slight strengthening on the euro which would suggest the dollar is under a degree of early pressure. Normally you would find the Aussie and Kiwi dollars under pressure in the wake of China PMIs below 50, but there has been little reaction as yet. The yield on US 10 year Treasury is slightly lower, again reflecting the minor move into safe haven plays today.

So as the morning wears on the PMIs will be announced through Europe and then into the US. The Eurozone is expected to show an improvement in France, Spain and Italy to be balanced by a slight dip in German meaning that the regional release at 0900GMT is expected to remain flat at 52.0. The UK release is out at 0930GMT and is expected to dip slightly to 51.3 (from 51.5). The interesting data point of the whole day though will be the US ISM Manufacturing which is expected to dip from 50.2 back to 50.0. If there is a 4 handle on tha data there could be a sizeable reaction on the US dollar.

Chart of the Day – Silver

For the past couple of sessions, silver has been on the brink of a big near tm medium term breakdown. The gold price has been under huge pressure but silver has just managed to hold on to the key historic pivot support at $15.50. A close below this key level would complete a top pattern which would imply $14.80. Although this level has not yet been seen, the pressure is mounting. The concern is the deterioration in the momentum indicators with the Stochastics in sharp decline, whilst the RSI and MACD lines are also in reverse. The early trading today has seen the price falling below $15.50 but a close below would now be confirmation (or an intraday dip below $15.36. The hourly chart shows there is now intraday resistance $15.60/$15.70 whilst hourly momentum shows that near term rallies should be seen as a chance to sell. The next support comes in around $15.05/$15.15.

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The rebound off $1.0894 continues to move once more towards the pivot band $1.1050/$1.1100 which seems to remain a barrier to the upside. The underside of the old multi-month uptrend is also an element of resistance and the concern is that this rally is once more setting up the euro for another fall. However this is in conflict with some minor recovery in the momentum indicators so for now, I am mindful of making any major calls for a retreat. There is always an element of doubt when you get rallies that are seemingly counter trend, but right now I am conscious that the consistent use of the pivot band as a turning point is still prevalent. The intraday hourly chart shows hourly RSI and MACD lines merely unwinding back into a level which has unwound oversold momentum on a near term basis. Friday’s high is another important near term level at $1.1070 with resistance up towards $1.1100. Initial support is now at $1.0985 and a break below $1.0965 would imply a retest back of the support at $1.0894.

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The sharp rally on Friday has certainly significantly improved the outlook, but taking a step back and looking across the last couple of months, nothing has yet been achieved. A strong bull candle may have broken the initial resistance but $1.5510 remains intact and this is the key overhead barrier on a medium term basis. Furthermore, I spoke a couple of weeks ago about the RSI which has consistently failed up around the 60 level and this is another barrier The improvement has come in the Stochastics though which have ticked higher. So a bit of a mixed outlook now. The day following a strong bull move is always interesting as it can set the tone. So far there is uncertainty, whilst it is also interesting that the hourly MACD lines and Stochastics have crossed lower. The immediate resistance of Friday’s high at $1.5467 needs to be breached otherwise the bulls could quickly lose impetus. A decisive break back below $1.5410 support would re-open $1.5300/$1.5360.

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The consolidation that Dollar/Yen has been building over the past week or so is in increasing danger of rolling over and forming a near term top pattern. It is never a good idea to call a top before confirmation, however the momentum indicators are beginning to turn lower (especially the Stochastics) and this suggests that upside impetus has been lost. I am now concentrating on the near term support at 120.15 which has been holding for the past few days but is coming under increasing pressure. The bearish outside day on Friday has continued lower today, whilst it is also interesting that the hourly chart shows that the momentum is building to the downside now. I continue to look at 119.60 as a near term pivot level within the medium term trading band and the likelihood of a move retreating towards the pivot is increasing. Initial resistance comes in at 120.80, with 121.50 where the key resistance starts coming in.

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The steady grind lower on the gold price has been now falling to a stage at which there is a serious suggestion that the bears are close to being in control yet. There are though a few factors that means I am retaining a belief that the outlook is neutral. The slide in the price has dipped back to the topside of the old downtrend and this could now become supportive. Furthermore, the support at $1136.50 has now been decisively breached (although an intraday dip to $1134.60 has been seen, a minor rebound has also left a bull hammer on the daily candle which is admittedly far too early in the session to start thinking about a reversal but a daily close below $1136.50 would be needed. However, the case for being bearish and talking about downside targets towards $1104 and lower is mounting now. Momentum indicators are bearish and lower highs with lower lows is now a consistent theme. The resistance at $1151 is now key on the hourly chart and a near term outlook of selling into strength is the strategy. Above $1151 would change that.

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Despite Thursday’s “doji” candle (which reflects uncertainty with the prevailing push higher), the support has remained in place for WTI. The trading in the days since the sharp rebound has been choppy to day the least, however importantly the support of the reaction low at $45.15 remains intact and tis is fast becoming a key near term level to work with. The improvement subsequently continues with the Stochastics rising strongly now. However, I continue to view this range between $42.60/$50.90 as a trade around the Fibonacci retracements of the $61.50/$37.75 sell off. The support of the range low around 23.6% at $43.35, with the resistance around the 50% at $49.60. It is therefore the 38.2% Fib retracement at $46.80 that needs to be breached to really suggest the bulls are in with a chance of being in control. A decisive move above resistance at $47.50 would confirm.

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