There are two main issues that are driving markets as we move towards the final throws of 2015. Firstly, sentiment is being negatively impacted by the consistent decline in the oil price to multi-year lows and also how to position ahead of the December FOMC meeting. Equity markets continue to be dragged around by the oil price which despite acting as a pseudo tax cut for oil importing nations, has significant implications for the lack of global demand. There seems to be little respite for oil so the question then becomes, can markets make the disconnect and start to trade independently of oil. For now this seems to not be happening. Forex markets are lacking overall direction and seem to be jostling for position ahead of the crucial Fed meeting next week. After the miss-reading of the ECB intentions last week there is a sense that they do not want to make the same mistake again.
Despite managing to break a 3 day streak of losses, Wall Street closed off its highs and only managed to gain +0.2% as oil continued to fall away. Asian markets seem to be dogged by both the oil price declines and the FOMC meeting, with a lack of any real direction, although the Nikkei was able to grind out a 1% gain. European markets are also a subdued and mixed bag in early trading today. In the forex markets, the choppy moves continue with a mixed outlook on the dollar, with the euro gaining but the yen weaker. Gold and oil continue to drift lower after yesterday’s slide.
Today we have one of the final pieces of core tier one economic data before the Fed meets on Tuesday next week, with Retail Sales announced at 1330GMTand an expectations of +0.3% month on month. Core Retail Sales have missed expectations in every month this year apart from June. At 1500GMT the preliminary reading of the University of Michigan Sentiment is also announced, with an expectation of 92.3 which would be up from the downwardly adjusted 91.3 from last month.
Chart of the Day – Spanish IBEX
Any concerns that traders may have with a decline on the DAX are somewhat overshadowed by the weakness on peripheral Eurozone markets such as the Spanish IBEX. From a technical perspective, the chart has recently completed an excellent example of a head & shoulders top with a move below 9992. With a two day close below the neckline the IBEX has confirmed the move. The concern is also seen in the confirmation on the RSI which is extremely bearish, the declining MACD lines and the Stochastics. The downside projection target implies a move back to 9360, with a full retracement back to the late September crucial low of 9231 possible if the momentum takes hold. Look to use the near term rallies as a chance to sell now, with the neckline resistance at 9992 and key near term reaction high at 10,158 forming a key band of overhead supply. Initial resistance comes from Wednesday’s reaction high at 9931, whilst initial support is at Wednesday’s low of 9713 and then back down at 9429.
I think that yesterday’s price reaction reflects well what will be trading in front of the FOMC meeting now. A sharp bull move on Wednesday being retraced amid jostling for position in front of a huge fundamental event that could dramatically change the outlook. There has been an unwinding of the short euro trade as the market read the ECB completely wrong, there is a sense that the same mistake will not be made for the Fed. Hence why I think now we will get a few days of choppy trading. The overhead resistance of the old pivot band $1.1050/$1.1100 looms large as resistance and the euro has been dragged back again. The momentum indicators are settling down bit now and it does not look likely that the euro rally will breach $1.1050. However the intraday hourly chart shows that there is now a good band of near term support above $1.0795 and up towards $1.0900. I expect the support to hold and the market to trade between here and the long term pivot band above $1.1050.
In a way the near term outlook is a difficult play on Cable currently. The last 7 sessions have shown that the days when the dollar bulls lose control, the appetite to buy Cable is strong, but generally there is a sense that this is still a near term corrective move within the medium to longer term downtrend. Again the sharp bull candle has been followed by a drifting negative candle and the drift seems to be continuing early in today’s session too. The daily momentum indicators are less decisive than they have been as the Stochastics are now reflecting improving momentum but the RSI has still merely unwound to 50 and looks to imply that rallies are a chance to sell. With the daily chart showing that the technical rallies of the past few months have tended to last a couple of weeks and this would suggest that we are now beginning to look for the next medium term sell signal. The downtrend currently comes in around $1.5255. The intraday hourly chart shows the loss of support around $1.5150 overnight and the drift back could now test the support around yesterday’s low at $1.5110. A breach of the support would open $1.5050.
The big test for the near term outlook on Dollar/Yen is the old support which has now turned into new resistance around 122.20. This is the overhead supply of the recent breakdown and could prove to be a barrier for the rebound of the past couple of days The momentum indicators remain in corrective configuration following the sharp breakdown and a failure at 122.20 could be seen as another near term sell signal. Look towards the intraday hourly chart and the hourly RSI, which if it moves consistently above 70 it would imply that momentum was building in the recovery and the bulls were getting their confidence back. Above 122.20 opens the pivot around 122.70 again. However the hourly Stochastics have already rolled over and threaten a near term sell signal once more. Initial support comes in between 121.60/121.85 with a breakdown re-opening 121.25.
The recovery on gold seems to have lost impetus now as the price action over the past few days has been rather drab and corrective. The momentum indicators have rolled over and specifically the Stochastics are now in decline once more. The early moves in the Asian session have seen a breach of the reaction low at $1067.75, which although has not been held, it does reflect the gradual erosion of the recent gains. I now believe that there is a lower high in place at $1085.20 and this is likely to be followed by an additional lower high. The over-riding trend remains bearish and rallies should be seen as a chance to sell. I expect that this minor rebound today will be used as one such rally, with yesterday’s high of $1076.60 the initial barrier. I would expect the bears to resume control and to retest the low at $1057.25. In front of the FOMC meeting I expect trading to be rather fractious and it could provide some choppy trading but I expect the gold price to remain under pressure.
The bulls just cannot get any sort of a foothold in WTI at the moment. The deterioration is now to the extent that the daily traded range is failing to break back above the old key floor at $37.75. There is now a key band of resistance forming between $37.75/$39.00. Momentum indicators remain deeply bearish but also with further downside potential so there is little sign of any recovery at the moment. The concern for me is that this is still the case despite a sharp move away from the US dollar recently. Any rallies should continue to be seen as a chance to sell for further weakness on course for the 2008/2009 lows of $32.40/$33.50. There needs to be a decisive break back above $39.00 before the bulls can even think about a recovery.