Oil price correction hitting market sentiment on a quiet day

Market Overview

Sentiment is looking rather mixed as we go into a shortened trading week due to the Easter holidays with little major US economic data to drive markets. However there is once more a sense that the oil price is ready to drive markets again, with the slight correction in place since Friday’s announcement of a surprise increase to the Baker Hughes Oil Rig Count (by just the one rig) bucked a trend of the past 3 months. The slide in the oil price has pulled markets lower in Europe, although Asian markets have been relatively mixed overnight in the absence of Japan which has been on a public holiday.

Forex majors are showing some support for the US dollar in early moves today as some of last week’s sharp moves are being unwound. It will be interested to see if the dollar bulls can gain any real traction or whether this is just a bounce for the dollar that will be sold into. The price of sterling is under pressure whilst the commodity currencies most exposed to oil (Loonie and Kiwi) are also underperforming with the oil price well over 1% weaker. Gold is also trading around $10 lower as the dollar has strengthened.

There is very little on the economic calendar to impact on market risk appetite today other than existing home sales which are forecast to drop by around 2.2% to 5.34m (from 5.47m last month).

Chart of the Day – USD/CHF

The dollar has weakened against all the major currencies since the Fed decision. This move has driven markets through some key levels and Dollar/Swiss is one market that is seriously testing key levels now. The key February low at 0.9660 held a couple of tests on Thursday and Friday but this support is likely to come under further pressure in the coming days. The momentum indicators have taken on a more corrective configuration on the daily chart and with all moving averages falling in bearish sequence, rallies should be seen as a chance to sell. The old support at 0.9800 which was the December low and has acted as a key pivot in the past week or so and this is a prime selling level if there is a rally in the next day or so. A closing breakdown below 0.9660 would open the next key low which was the October support at 0.9475. A close back above 0.9800 would improve the outlook but the medium term outlook has now shifted and the bulls are now under much greater pressure.

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The euro started to pullback from its recent sharp gains after comments on Friday from the ECB’s chief economist Peter Praet who noted that further cuts to the deposit rate were possible (despite the comments from Draghi in his press conference). This has pulled the euro back from resistance now in place at $1.1342 to bolster that resistance from the February high at $1.1375. However so far this could simply prove to be an unwinding move that helps to renew upside potential. The momentum indicators are still looking strongly configured and so far the suggestions are that this is a correction that is likely to be bought into. The intraday hourly chart shows there is a small band of support between $1.1200/$1.1240 which also contains the support of the previous breakout at $1.1217. The hourly momentum also suggests that this small dip back from $1.1342 has helped to renew buying momentum. There is further support at $1.1125.

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The strong upside break on the back of the dovish Fed last week is just correcting its move now. An 85 tick doji candle on Friday reflected an uncertain end to the week, which has followed on to a corrective open on Monday. This move is again back below the pivot support at $1.4410 which also contained Friday’s low, which has put the bulls on the back foot today to test the “Marabuzu line” of Thursday’s strong bull candle at $1.4375., A break of this Marabuzu line would add to the corrective element. Momentum indicators are still positively configured for the recovery, although I am mindful that the bulls need to sustain the impetus due to this still being a recovery within a longer term downtrend. The hourly chart shows a completed small top pattern completing below $1.4410 which which implies $1.4310. There is an old pivot support at $1.4280. The bulls are just taking a step back, but they need to ensure that it does not turn into anything deeper otherwise the move towards $1.4575/$1.4670 will have been lost.

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Time for a consolidation. The selling pressure on the pair made the intraday break of 110.98 (to leave support at 110.65) and has also now seen a two day close below 112.00 (at an almost 18 month low), but there is now a sense of the bulls just hanging on still by a fingernail or two. Friday’s green candle was the first positive candle in a week but has added an element of support now. Despite this, the momentum remains negatively configured and rallies will struggle to gain any real traction before the sellers return again. The overhead resistance at 111.75 to 112.15 is now prime selling opportunity today and in the absence of any dollar moving data in the coming days the prospects of a sizable rally building are low.

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My insistence on the negative implications of the bearish divergence across the momentum indicators on the daily chart will not have been reduced by the price action on gold in the past few days. The drift lower has formed a couple of completed bearish candles and the early morning move today has continued the corrective drift. The recent failure at $1270.90 has added to the overhead resistance between $1270 and the recent high at $1282.50 and the bulls just cannot gain the traction in a strong run higher. The momentum indicators falling away again suggest that the support band at $1224.00/$1225.70 will come back under pressure. The hourly chart shows a new pivot band has formed around $1255 which is the overhead resistance now as hourly momentum indicators turn increasingly corrective and show that rallies are failing at lower levels now.

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The outlook for the daily chart remains strong with a trio of positive daily momentum indicators and a breakout above the old resistance at $39.00 which opened upside towards the next key resistance at $43.50 (which also happens to be the upside target from the big double bottom). However, helped by a slight uptick in the Baker Hughes Oil Rig Count, a near term correction on oil is playing out, drive by the bearish divergences on the hourly momentum indicators. This has dragged the price back into the support band $38.50/$39.00. This is a correction which may help to renew upside potential, with hourly indicators now quickly having unwound. I would still view this as a good opportunity to buy as the daily indicators remain strong. The bulls remain in control whilst above the key pivot support at $37.35.

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