Traders watching key ISM data which could scupper the rally

Market Overview

The trading outlook continues its improving trend as a whole range of markets show that sentiment is far less stressed than it was just two or three weeks ago. With US Treasury yields climbing, oil price on the rise and a breakout in copper, several key signals are all moving positively around the same time. Traders will though be watching the key service sector data from the US, the ISM Non-manufacturing, which could potentially scupper the rally. Last week’s Markit services PMI dropped unexpectedly below 50 and this puts added pressure on today’s ISM Non-manufacturing data which is only expected to dip very slightly to 53.2 (from 53.5 last month). In the meantime though, US markets continue to grind higher with the S&P 500 up 0.4% with the Asian session stronger (Nikkei 225 up 1.2%), whereas the European session is a touch more cautious, trading slightly lower in the early moves.


In the forex markets the main mover is once more the weakness in the Japanese yen which continues to retrace the recent strength. There is little other real direction toerh than sme slight strength on the Aussie and Kiwi. The gold price has remained supported and oil is mixed to slightly lower so far.


Traders will be looking out for the service sector PMIs today. The China Caixin services PMI have already shown only slight growth as the data dipped back to 51.2 (from 52.4), but that did little to dampen the spirits of equities in the Asian session. The morning is dominated by the Eurozone PMIs which culminates with the regional final Eurozone composite PMI which is at 0900GMT and is expected to be 52.7. The UK services PMI is at 0930GMT and is expected to show 55.1 (down from last month’s 55.6). Other data releases include the US weekly jobless claims at 1330GMT which is expected to stay around 271,000 (272,000 last week), whilst the US Factory Orders are at 1500GMT with an expected +2.0% for the month.


Chart of the Day – Silver

Silver may have bounced yesterday but the deterioration in the technical indicators has continued since the price topped out on Friday last week. The move saw a close below $15.05 which completed a head and shoulders top pattern that implies $14.20. On Tuesday the chart saw a pullback to the neckline fail, a move that interestingly also came around the 21 day moving average (currently at $15.18) but which had acted as a basis of support during the rally. I am also conscious of the 38.2% Fib retracement of the rally from $13.71/$15.95, which at $15.09 provided the basis of support during the top formation and also adds to the overhead barrier to gains and is now overhead resistance. There is also a downtrend channel that can be derived over the past three weeks. The concern for me is the continued deterioration in the RSI over the past few weeks whilst the MACD lines also continue to drift weaker. With so much pointing towards a corrective outlook and a retest of the $14.57 recent low looks likely to be seen. The top of the downtrend channel comes in at $15.35 today.

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The euro is consolidating above the key support around $1.0800 and the question will now be asked whether this is going to be a potential recovery formation or just the pause before the serious test of the support. Yesterday’s doji candle reflects the uncertainty of the outlook, however early trading again today shows the euro cannot gain any real traction to the upside yet. Momentum indicators continue to drift lower with the RSI now well below 40 and the MACD lines moving towards negative. Furthermore, the Stochastics are very negatively configured. However the bulls would point to the big support which is intact and that the selling pressure has started to abate (at least for now). Looking at the hourly intraday chart there is little really to get excited about on the long side, with the sequence of lower highs and lower lows, combined with momentum indicators which simply unwind back to levels at which the sellers move in again. This means around 60 on the hourly RSI and neutral on the hourly MACD lines. The trend is your friend on this one and I am expecting the serious test of $1.0800, below which opens the key January low at $1.0710. The resistance band is $1.0890/$1.0910 before $1.0960.

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A strong bull candle has induced a rally on Cable which has opened the prospect of a near term recovery. Cable has been trending lower for months, but the sharpest downtrend is a 12 week downtrend dating back to mid-December which today comes in around $1.4350. This would mean that there is plenty of room to still unwind if the recovery bulls can gain the traction. However, there is sizeable resistance to breach first. I have been saying that I felt there was overhead supply around the old January low at $1.4080 and this is where Cable is trading around today. However there is further resistance towards $1.4145 and $1.4235 making what I will now be eying up as a potential sell zone. I still see these rallies no Cable as a chance to sell again and that is what I will now be looking out for. The rally has the backing of the Stochastics which have turnd higher and are on the brink of a near term buy signal however I see this as all counter trend. The bulls have therefore got a lot to do to suggest any recovery is a sustainable move and any sell signal is likely to be pounced upon again. Initial support is now at $1.4043 and $1.4015, with $1.3900 key near term.

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The near term outlook on Dollar/Yen still looks rather messy with another retracement candle being posted yesterday. However the appetite for the correction was far lower yesterday and interestingly, the 23.6% Fibonacci retracement around 113.50 was able to contain the move and from which it is also looking to regain the recovery initiative today. I am also increasingly encouraged by the momentum indicators which show the Stochastics looking to accelerate higher again, whilst the RSI and MACD lines also move higher. The immediate test for the bulls today is trump yesterday’s high at 114.55 before pushing on to the key band of overhead resistance that starts at 114.87 with the 16th Feb high and then the38.2% Fib level at 115.07. The intraday hourly chart outlook is strengthening with the momentum indicators more positively configured. The support of the pivot at 113.15 has been strengthened by yesterday’s low.

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I remain torn between my experience that tells me that the “trend is your friend” and you need to stick with the trend (in this instance it is higher) and the momentum indicators which whilst still positively configured, do not convey the confidence that should be associated with a strong trend higher. I have drawn in the overhead downtrend that links the lower highs, to now accompany the uptrend that has been in place for 3 weeks. This all reflects more of a consolidation pattern effectively. However the convergence of the trends means that something will have to give soon. Another 3 week closing high sees the drift higher continue and this whole pattern could still turn out to be one big consolidation wedge pattern from which a continuation move results. But for now we must await the breakout. Watch the resistance in at $1248.60 and $1252.90 which protect $1260.60. The nature of the bull candle from yesterday now means that $124.10is important with $1211.20 key near term. The medium term key support remains the $1190.40 reaction low. The hourly chart reflects neutrally configured momentum.

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WTI remains on the brink of a big breakout. The price continues to move higher and on an intraday basis pushed above the $34.80 resistance. The move could not quite achieve the close above the resistance needed to complete a medium term, 8 week base pattern that would imply a recovery towards $43.50. However, the bulls remain in control for now. I continue to like the improvement in the RSI which is now above 60 and around a 5 month high, whilst the Stochastics are also gaining strongly. The big long term technical move is coming also with the breaking of the 21 month downtrend which has been in place since the oil price peaked at $107 in June 2014. The recovery uptrend also continues to track higher leaving a series of higher lows, with the support now in place at $32.30 and $30.55. The intraday hourly chart also shows initial support at Tuesday’s low at $33.37.

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