Despite early gains, the market rout is not over yet

Market Overview

Global financial markets are not in meltdown (yet), but the sentiment around trading is deeply negative. This is driving investors towards safe haven plays such as the yen, US Treasuries and gold, whilst cyclical trades such as oil and metals are being smashed. The oil price dived by 7% yesterday after the International Energy Agency noted, rather unhelpfully, that the market was “drowning in a pool of oversupply”. Support seems to be almost non-existent at the moment and this is driving huge volatility across equity markets and fearful moves across forex. The rollover of the February futures contract has pulled the oil price higher this morning, however this is not real buying pressure that should be overly trusted. The fundamentals and technicals continue to point to a lower oil price and this can only be negative for global market sentiment. Despite an early bounce today, this rout in the global markets is not over yet, not by a long shot. Can (or should that be, will) the ECB do anything at its monetary policy meeting today to arrest the decline in risk? Although it is possible, I do not expect any great shakes out of the meeting today.

A rollercoaster of a session on Wall Street say sharp intraday losses rebound into the close, with the S&P 500 only down 1.2% (17 ticks lower having been as much as 68 ticks lower at one stage). Asian markets have also been weak into the close with the Nikkei down 2.4% and despite a positive open on European markets it will be interesting to see if the gains can last. In forex trading, there is less volatility in the early moves, but there is still a tendency for safe haven preference, with the euro and yen both stronger again and the commodity currencies slightly weaker. Gold is managing to hold its move back above $1100 from yesterday, whilst oil is slightly weaker.

The main focus for traders on a data front today is the ECB meeting an press conference. After the 10bps cut to the deposit rate last time out it is unlikely that the ECB will move again this time. The press conference at 1330GMT could give some added volatility (as Draghi is likely to do his usual trick of trying the jawbone the euro lower), but nothing too much is expected. Also at 1330GMT the weekly jobless claims are announced with 278,000 expected, whilst the Philly Fed is also at 1300GMT and is expected to be -5.0. Crude oil inventories caused volatility in the oil markets last week. The announcement is at 1600GMT with an inventory build of 2.6m barrels.

Chart of the Day – German DAX Xetra

The selling pressure on the DAX (as it has been across equity markets) has been huge in recent weeks, with the DAX down over 12% in 2016 alone. The move has now hit the 76.4% Fibonacci retracement of the big 8355/12,390 rally at 9308. The big question is whether this Fib level will be able to provide the consolidation and ultimately key support area that we saw in August/September, when the DAX hit lows of 9338 and 9325. An intraday low at 9315 was hit yesterday before a small rebound into the close. Early trading today is seeing a bit of an unwinding rally, but I do not see this as a sustainable move or the beginning of a recovery. The concern is that the momentum is bearish on the RSI but not excessive (RSI hit 19 in August before the bounce). The initial support on a breakdown of the Fibonacci level is at 9150, but there is little real support until a full retracement back to the 8355 October 2014 low. The intraday hourly chart shows the DAX is another chart that is showing classic bear market characteristics with old support being the basis of new resistance. Initially this means that on the bounce this morning, a band of resistance at 9450/9490 comes in with more sizeable overhead supply at 9800/9885. I am not confident of the Fib level being supportive for too long.

DAX   21012016


Once more just as it looks as though the euro is gaining some upside traction, another intraday reversal has stopped the bulls from gaining control. Interestingly also, once more the resistance and overhead supply between $1.0950/$1.0990 has been sufficient enough to pull the price lower again. This has resulted in another long upper shadow on the daily candlestick and another close around the $1.0900 area. The closing prices in the past 4 days have all been within 25 pips. This suggests continued uncertainty over direction and some may feel this is to be expected in front of the ECB decision today, but I see it more as a reflection of the current market and the pull between safe havens and the dollar. The bulls will hold on to the fact that the sequence of higher lows continues with $1.0860 being bolstered overnight. However in truth the volatility around the ECB meeting today is likely to mean that we hold on to this neutral outlook ahead of the press conference. Key levels for a near term break remain $1.0810 and $1.0990.

EURUSD   21012016


A 37 pip rally may not sound a lot but the bulls have been feeding off scraps recently and they will take anything they can get right now. The first positive (or should that be non-negative) candle we have seen on Cable for weeks has done little to change the outlook and looks to be more of a pause for breath if anything. The massively overstretched nature of the momentum would suggest that if there were to be a rebound, it is likely that it would be a sharp rebound (driven predominantly by short covering). This move has held Cable under its $1.4230 old floor and there is no suggestion yet that there is any move to recover on the momentum indicators. I have talked at length previously about the stepped decline and the old support being new resistance and this remains the case, with a band around $1.4235/50 to be watched today. The hourly momentum once more looks simply to be unwinding to renew downside potential again, with the MACD lines and RSI again approaching levels where the bears have resumed control. I would expect a retest of the $1.4125 low and with further downside towards the next psychological support at $1.4000 likely. There is further resistance at $1.4350.

GBPUSD   21012016


The chart of Dollar/Yen can be infuriatingly dull sometimes, but this is not one of those times. The volatility has picked up enormously in the past few days, and with over 170 pips of daily range yesterday with sharp intraday moves, the price action around the pair is a key indicator for the current market turmoil. The intraday breach of the August spike low at 116.46 (the last time that global market sentiment had a real wobble) shows this is now a real problem. Despite the rebound to close well off the lows, the price action this morning which shows further weakness is again a negative for sentiment. A close below 116.46 would be very negative now. Momentum indicators remain bearishly configured and the selling pressure does not seem to be done quite yet. The intraday hourly chart shows the rally peaked at 117.45 under the 118.10 low, whilst hourly momentum has also given a range of sell signals early today. The rollercoaster may not have finished yet.

USDJPY   21012016


After days of rather benign trading, the gold price finally woke up to the market demand for safe haven plays, an environment in which gold should benefit. The price duly made an upside break above the old resistance band at $1098 and puts a more bullish bias to the near term outlook. The next task for the bulls is to hold above $1098 and then to make a break above the $1112 peak of early January. The momentum indicators also reflect the marginally bullish bias (although I do still feel slightly underwhelmed with the rally on gold during this time of significant market turmoil). I will though be turning bullish on a close above $1112. The hourly chart shows the improvement and also that the old resistance within the band $1093/$1098 will now give the bulls a $5 buffer of support to work from. A break back below $1093 resumes the neutral outlook, with key support still around $1077.

Gold   21012016


Even for the moves in recent weeks, the dramatic decline in oil yesterday was something to behold as the bears dragged the price 7% lower. The oil price has now fallen over 15% in trading this week. There has been a jump overnight in the price, however this is largely due to a technicality on the rollover of futures contracts rather than the appearance of any buying pressure. On a technical analysis basis there is very little, if anything that the bulls can apparently do about the price weakness for now. The momentum is so strongly negative across all indicators that it is like a runaway train now. The RSI hit around 20 yesterday, at levels not seen since the huge bear trend that developed through December 2014. The 100% Fibonacci projection target of around $27.10 has been blown out of the water. With prices at levels not seen since 2003, the next support comes in a band of key lows $24.80/$25.00.  The hourly chart shows the initial resistance is at $28.00/$28.35 and this is where we find the new price trading today, however I would imagine this will be a level to start selling again. The real near term resistance comes in around $30.00/$30.20.

WTI   21012016