Oil continues to derive market direction

Market Overview

Can we trust a market recovery that is built on a continued short covering rally in the oil price and yet more jawboning from the ECB? The answer could come today as early strength from the Asian session has dropped off again as the oil price has stumbled and this continues to derive market direction. There had been a couple of days of strong gains which quickly improved the outlook of a market that had come back with an almighty new year hangover. However , risk appetite slid back this morning as gains on oil have dropped away again and the oil price starts to retrace some of the 9% rebound in oil on Friday. Such a huge rally just shows a market so stretched and lacking real depth, that it is difficult to truly be trusted. Wall Street closed with another 2% gain on Friday and this continued into the Asian session today with gains across the board, but the European markets now mixed again in the early exchanges.

In forex trading, early moves are being reversed as risk appetite has waned with the oil price turning lower again. This means that the yen has started to strengthen again, whilst sterling is off and the Aussie and the Kiwi are also reversing. The Canadian dollar is the main underperformer today. This retrenchment of risk has helped to pull the gold price higher again.

There is a light economic calendar today (ahead of a heavy week), with the German Ifo Business Climate dominating the European data ant 0900GMT (expected to dip slightly to 108.4 from 108.7). The Dallas Fed Manufacturing activity index is at 1530GMT and is expected to remain a weak -14.0 from -20.1 last month.

Chart of the Day – Silver

The bulls just cannot gain any sort of traction in this market. Once more the resistance at $14.40 has put paid to a recovery. Initial gains on Friday turned lower from $14.34 and has now formed a bearish shooting star candle. Coming as it has in a trading range reduces the impact of this negative candle but closing at the low of the day certainly does not reflect confidence in the buying, whilst it should also ensure that the resistance at $14.40 remains intact for a while longer. The momentum indicators suggest that silver will continue to play out this range and there could now be a retracement back towards the lows $13.60/$13.70. The Bollinger Bands continue to converge within the band and suggest that this period of low volatility is not ready for a breakout quite yet. It needs to see a two day close above $14.40 or below $13.60 to drive the break from this consolidation band, but in the meantime look to play the extreme levels on the hourly RSI, buying around 30 and selling around 70.

Silver   25012016


As general market risk appetite continued to rebound on Friday, traders have been selling out of their long euro positions. This is putting significant strain now on the key pivot floor which has for so many occasions over recent months provided a base to buy from again. That makes the trading over the coming days very important for the outlook medium term. The closing price on Friday breached the bottom of the support again, however, interestingly, so far the low from Thursday at $1.0777 remains intact. The momentum indicators are sliding back but without any serious conviction and it will be key to watch how the market reacts now there is a serious prospect of continued downside. A second closing breach would set up for further correction down to the January low at $1.0710. However, looking at the hourly momentum indicators there seems to still be a rangebound element, so it is a key day to watch the reaction of the bulls today. Resistance is around $1.0860 and $1.0900.

EURUSD   25012016


An unwinding bear market rally back towards the downtrend resistance (today at $1.4375) continues after a third consecutive green positive candle in a row (something we have not seen since early October). Momentum indicators are now showing serious signs of improvement too, with the RSI crossing back above 30, and the Stochastics also back above 20. The question is whether these are just the natural progression of an unwinding rally, or a genuine buy signal. I think the trend will have a big say, whilst the hourly chart is now showing the potential for a base pattern. The hourly chart shows that the stepped decline has the key resistance around $1.4350, so a move today back above Friday’s high at $1.4360 would complete a base that would imply $1.4680 as a possible recovery target. Corrections are now being supported at higher levels, with the old resistance at $1.4235 now supportive and with the early dip back, this will come under pressure today. If this support holds it would be another indication that the bulls are increasingly serious. A move back below support at $1.4200 would resume the decline.

GBPUSD   25012016


The bulls are really beginning to make progress now and there has been some significant resistance taken out in the past couple of days that would suggest there is some positive momentum and buying pressure once more. Momentum is much stronger now and the daily chart shows the RSI breaking a downtrend, the Stochastics advancing strongly and even the MACD lines having turned up. The series of resistance levels between $118.30 and 118.75 are no the brink of being taken out. The final hurdle that is preventing a bullish outlook in the recovery is a decisive move clear of 118.75. This has been the pivot from early January and is again acting as a consolidation point near term. If the bulls can break the shackles then the next resistance is not until 119.70 with 120 another hurdle. You would now look for old resistance to be seen as new support, with 118.10/118.35 giving initial protection to the downside. The importance of the 117.20 pivot is also growing.

USDJPY   25012016


The outlook for gold is still rather mixed. The market is once more consolidating and momentum indicators retain a slight bullish bias as the price continues to trade above the neckline of the base pattern. I have mentioned the $1098 pivot several times and it continues to trade around this level in the consolidation. However, tempering the enthusiasm for the bulls is the overhead barrier of the 144 day moving average at $1109.50 and for me the lack of bullish drive during the market turmoil recently. But with general sentiment improving, the gold price has not fallen away either. The low in place at $1071 is a given as a key resistance now and the bulls will look towards $1082.50 as a strong low in place. However there needs to be a continuation of the move back above $1109 and $1112 resistances to avoid traction and momentum being lost. For now it could be a waiting game.

Gold   25012016


A second consecutive big green (bullish) candle has this rally continuing. The fact that it is moving so fast (and on very little change to the fundamentals) suggests there is significant degree of a short covering rally. It will be interesting to see how far the move goes., and already on Monday morning the intraday reversal is questioning the rally. For the near term, the former resistance band $31.75/$32.20 needs to hold as a basis of support. The daily RSI is unwinding the oversold position and rallies have tended to pull the momentum indicator back to 50 as downside potential is renewed.  Another interesting feature of the hourly chart is that it shows the price consolidating around the $30 mark prior to the breakout on Friday, which would suggest this is an area where traders are clustering, meaning that it will act as a level of initial support now. A hold above $32.20 will open the next resistance band $34.00/$34.35.

WTI   25012016