Oil and China once again weigh on market sentiment

Market Overview

Risk appetite is taking a pummelling as oil has plummeted to multi-year lows and concerns over market moves in China continue to weigh on sentiment. A further 0.5% devaluation by the People’s Bank of China has also continued to impact on sentiment amidst concerns of a currency war. Additionally the Chinese stock market circuit breakers had to kick in for a second time this week as equities fell more than the 7% threshold in a matter of minutes, sending shockwaves through Asian markets. The sharp weakness in Wall Street and then Asia has filtered through to the European session which is again sharply lower.

The release of the FOMC minutes has impacted on the dollar which has curbed its gains against the euro. Noting that the decision to raise rates was a “close call” and suggests that there are still some balancing forces for the hawks. The euro bounced into the close last night and this move has continued today. The safe haven flows amid the market concerns continue to benefit the yen which is at a 5 month high against the dollar now. The concerns in China also continue to weigh on the commodity currencies, although the Kiwi is a notable outperformer today. Gold is another safe haven trade that continues to benefit, whilst the weakness on oil shows little sign of any let up.

There is little real market moving data to be announced today aside from the US weekly jobless claims at 1330GMT (275,000 expected). Therefore traders will have little to drive a break in these dark clouds that hang over the markets at present.

Chart of the Day – Silver

Comparing the performance of silver to that of gold in recent days shows the market’s mind-set. With the gold rally suggesting a resumption of its status as a safe haven trade, the fact that silver has struggled reflects the concerns the market has over its more cyclical properties. The technical analysis shows a base pattern completed on gold but you certainly could not say the same about silver. The big resistance on silver came in at $14.40 again at the end of December and there has been a real struggle to make gains ever since. Even now, there seems has been a struggle to break above $14.00 with a series of small bodied candles on the way. The momentum indicators are reflective of another chart that is merely in bear market rally mode still, with the RSI consistently failing just above 50, the MACD lines struggling around neutral. There is a chink of light though with a pick up in the Stochastics, which may help the bulls near term, however the overhead supply around $14.40 is sizeable and is prohibitive to a sustainable recovery, so rallies are likely to again be seen as a chance to sell. Initial resistance is at $14.19, whilst near term support at $13.73 protects the key December low at $13.60.

Silver   07012016


Having made the decisive break below $1.0810 on Tuesday, the euro has begun to embark upon a rally from $1.0710. Although I find this as a surprise it does not necessarily change the outlook that I have that the euro will continue to trade in the long held range and that the dollar bulls are not about to go on a big run again. The move came in the wake of the FOMC minutes last night which seemed to suggest there was far from a unilateral view on a rate hike despite the apparent “unanimous” decision. The euro has subsequently bounced back above $1.0810 but this is an area of overhead supply now between $1.0810/$1.0840 and I expect that this may be in the least an area of consolidation as the resistance kicks in. The momentum indicators have turned higher, notably the Stochastics on the daily to reflect the improvement. However the original break of $1.0810 was a decisive move and this has changed the market’s perception in the near term, meaning I believe there could be further weakness. The hourly chart could be key here as the RSI has already unwound. If the bulls can push back above $1.0840 then it could be a different story again but I see this as an unwinding rally today that is likely to peter out.

EURUSD   07012016


Despite the slightly dovish FOMC minutes, the trajectory of sterling remains lower, with the daily chart showing a continuation of the 3 week downtrend which today comes in at $1.4720. With the RSI dipping below 30 there is a temptation to jump on a recovery bandwagon, but we must remember the trend is your friend. There are few signs of any recovery formation on the daily chart, so we look towards the hourly chart for some green shoots. Once more the rallies continue to be sold into with a series of lower highs and lower lows. There is a slight improvement in the hourly momentum indicators, however the hourly RSI is still bogged down below 50 but if it can hold above 60 then perhaps there will be something in a near term rally. However for now all indicators suggest that the rallies will continue to be sold into. Near term resistance levels are in at $1.4680, $1.4725 and then $1.4800.

GBPUSD   07012016


The sharp strengthening of the yen amidst the safe haven flows continues and this has now dragged the Dollar/Yen pair below the key support at 118.04 and now to its lowest level since August 2015. The strength of the downtrend is such that at the moment there is little really to now suggest there will not be a retest of the key reaction low at 116.43. The RSI is certainly in strong downtrend mode, whilst the MACD lines and Stochastics have also just turned lower again. The hourly chart remains in deeply bearish mode as well. These trending situations for the yen tend to be firmly backed by the market and the moves have longevity, however it can also be a good idea to be fairly tight with stops as the market can snap back quickly if the mood shifts. The initial resistance is at 118.20, but there is now a key pivot level on the hourly chart built over the past few days at 118.75, with further key resistance at 119.70. The overnight low at 117.67 is initial support.

USDJPY   07012016


I have been talking up the prospects of a base pattern forming on gold for the past few days and now finally it has completed. Not only that there has been a strong confirmation on a move above $1098 overnight too. The pattern completed on a close above $1088.70 and now gives an implied target of around $1130. During the course of the big bear slide in the past few years, periodically gold will have these recovery phases and I believe this is a move to be backed. The improvement in the momentum indicators confirms the bull move and having broken through not only the overhead resistance at $1098 but also the $1100 psychological barrier, there is a confidence behind the move. These breakout levels will now become supportive with $1098 initially but also around $1089 down to $1077. The hourly chart also reflects the strong improvement with bullish momentum. The next upside resistance comes in around $1110.

Gold   07012016


I was right to be concerned that the bears were gaining control again as a sharp sell-off of over 5% has dragged WTI instantly back to a test of the crucial December low around $34.00, a level that has now been broken early today. There is now a clear run possible back towards even a test of the critical December 2008 low at $32.40, although there is a band of support from $32.40 to $33.55. Below $32.40 is the psychological $30 mark. However, the fact that Brent Crude has already broken to a new 11 year low does not bode well for the bulls either. Having lost around 14% over the past 4 days the momentum indicators have turned decisively bearish with a big sell signal on the Stochastics but also further downside potential on the RSI.. The intraday hourly chart does show that near term momentum is oversold so selling into a rebound is an option now. There is initial resistance at the $34.00 breakdown and then up at $35.15 and then at $35.90.

WTI   07012016