Sentiment looking cautious as a momentous week begins

Market Overview

On what looks set to be a momentous week, markets are beginning to trade with a slightly negative outlook with sentiment looking cautious. Although equities may have ended last week on a dampened note, the dollar has once more been strengthening ahead of a raft of crucial economic data events. This strength is pushing the trade weighted dollar ever closer to the key March peak of 100.4 which coincides with the key low at $1.0456 on EUR/USD. After a slight pause at the back end of last week, the US 2 year yield is looking to move higher again which should also be supportive of the dollar. With US traders back up to full strength following the reduced volumes of the Thanksgiving holiday, we can also expect some more decisive moves on equity markets too. The Asian session was rather weak overnight and this has put a negative spin on the early European trading.

In forex markets, whilst there is no decisive move yet, the US dollar bulls are still in the driving seat. The only real notable exception is a slight rebound on the Kiwi dollar today. The gold price remains weak, whilst oil is also trading lower.

There are a few of the more minor economic data events to be announced today, however it is also likely that traders will be building themselves up for the key moves likely to begin tomorrow with the PMIs. Today we have the US pending home sales at 1500GMT with a growth of 1.6% expected.

Chart of the Day – AUD/USD

It is interesting that the rally on the Aussie has begun to falter in front of the key meeting of the Reserve Bank of Australia (announcement overnight tonight). Technically, the indicators are beginning to deteriorate and the concern for the Aussie bulls is that there has been a sell signal on the Stochastics (which is possibly set to confirm today). This is only the third Stochastics sell signal in three months with the other two working excellently well. The support at $0.7157 is key today and is already under threat and a breach would also break a 3 week uptrend. This is the latest reaction low in the rally and a breach of this support wold put the bears seemingly back in control. The hourly chart shows the deteriorating outlook now with hourly momentum bearishly configured. Resistance is now in place at $0.7240 as the first lower high within the recent sell-off. Selling into the early strength today looks to be the strategy. Below $0.7157 opens the key reaction low at $0.7067.

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The dollar strength has returned after the briefest of pauses for the Thanksgiving holiday and this has continued to pile the pressure on EUR/USD. The pair continues to fall back and although the initial support at $1.0565 remains intact (only just) the weakness of the momentum indicators would suggest that there is little real prospect of any meaningful support until a test of the crucial March low at $1.0456. The bearish outlook is likely to continue (barring the odd possible intraday rally on economic data – PMIs possibly on Tuesday?) until Thursday’s ECB monetary policy announcement. So selling intraday rallies remains the strategy, with initial resistance of Wednesday’s high at $1.0690 still in place as the main near term resistance, although there is still minor resistance with $1.0640 and $1.0610.

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With the dollar strength from Friday pushing Cable ever lower the support at $1.5023 is seemingly being broken down. Having been breached overnight in Asian trading it will now be interesting to see if the Europeans confirm the move. Momentum indicators certainly do not look encouraging for the sterling bulls, with the Stochastics having kissed to turn lower again, the MACD lines falling and the RSI with further downside potential. A close below $1.5023 would be a 7 month low and open the prospect of further weakness towards $1.4850 near term and possibly even a full retracement towards the April low at $1.4563. There bulls will have on to the fact that there are fairly consistent rallies which come through but there would have to be a significant improvement above $1.5335 for any move to be considered sustainable. The mains near term resistance is now at $1.5135 with initial resistance as a hurdle today at $1.5070.

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The dollar bulls have returned strongly to stave off the initial threat of a top pattern completing on a move below 122.20. The move saw early selling pressure being turned on its head, to form a bullish engulfing candle (bullish outside day bar). It was an impressive return from Thanksgiving holiday for the dollar bulls however more needs to be done today with another positive candle to confirm the move. Dollar/Yen has a tendency to form these candles within a range and to give false near term signals, so I would wait for confirmation today before garnering too much direction from Friday’s trading. The resistance at 122.93 needs to be decisively breached today, and ideally above the further resistance at 123.25. Watch for the hourly RSI moving above 70 to confirm that the near term outlook is becoming stronger again. In the absence of these conditions the near term range is likely to continue above support at 122.20.

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I wrote last week about the continued downside pressure on gold with little real sign of any recovery, and this was certainly the case when the two week downtrend once more kicked in to send gold to a new 5 year low. The closing level of $1058.40 was the lowest since February 2010 with the next low of support in at $1043.75. There is now the very real prospect of a retreat to the hugely psychological support at $1000. The momentum indicators remain bearishly configured and there is still very little suggest any impending recovery could be looming. The old support at $1065 now becomes the first line of resistance for a rebound today but I would still be viewing any rebounds as a chance to sell.  The hourly momentum indicators are stretched and have room to unwind today so perhaps look to use this as an opportunity. There is further resistance at $1074.50. Initial support comes in from Friday’s low at $1052.50.

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The old floor of the support band between $42.60/$43.70 continues to provide the overhead supply for the bears to once more return and scupper the rally. The subsequent bear pressure on Friday is now setting up for a resumption of the sell-off where the rallies continue to be seen as a chance to sell. The technical resistance is bolstered at $43.35 which is also the 23.6% Fibonacci retracement of the big July/August decline to $37.75. The concern for the bulls is that the momentum indicators are rolling over and the RSI suggests renewed downside potential. After Friday’s strong bearish candle, a decisive move below the pivot band of Thursday’s low at $41.70 down to $41.50 (an old pivot) would re-engage the sellers once more. The formerly improving momentum indicators look to be rolling over once again. A confirmed move below $41.50 would open the initial support at $40.40 and also the key support around $39.90. The bulls need a push back above $43.50 resistance to get them back on track.

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