US data is a glass half full as positive outlook continues

Market Overview

There seems to have been a change in the general attitude of traders in the past week or so. Previously we were seeing questionable economic data being taken as a negative, whereas now it seems to be a positive for the markets. The continued rally in the oil price is certainly helping to enforce this glass half full mentality but also the improving US economic data, and there is certainly more of a positive outlook amongst market participants lately. The ISM Manufacturing data is a case in point. The data picked up off its lows yesterday and beat expectations, but at 49.5 is still a number in contraction territory, just not as bad as had been feared. Whether this should justify a Wall Street rally of 2.4% on the S&P 500 is debatable however the outlook is now certainly more positive than it had been just a couple of weeks ago. Asian markets have followed suit with a huge rally too, with the Nikkei 225 closing 4.1% higher, this coming despite the People’s Bank of China setting the mid-point for the yuan weaker again (something which has tended to be a drag on sentiment). European equity markets are also strong again today.


In forex the outlook is more circumspect with a mixed outlook for the dollar. The gains made against the euro and the yen are offset by a stronger sterling and Aussie.  The Aussie gains of around 0.5% are coming as Australian GDP was much better than expected at 3.0% for the Year on Year data. Gold is trading over $5 lower as yesterday’s slide continues, whilst the oil price is a touch mixed.


Traders will be on the lookout for the ADP employment change at 1315GMT which is expected to show a slight dip to 190,000 from 205,000 last month. The UK construction PMI at 0930GMT is expected to show 55.5 (although construction is only a small component of the UK economy). The EIA weekly crude oil stocks at 1530GMT is expected to show another inventory build of 3.5m barrels (similar to last week).


Chart of the Day – DAX Xetra

The bulls continue to fight back. Having used the old 76.4% Fibonacci retracement of 8355/12390 as the basis of support on Monday, the bulls have used this as a platform for a burst back above the resistance around 9600. Interestingly this now re-opens the 61.8% Fibonacci retracement at 9897 and the resistance of the January rebound high at 9905. The encouragement is also driven by the RSI which yesterday closed at its highest level since early December (the point of when the big sell off really kicked in. Additionally, the MACD lines are accelerating higher and the Stochastics are also in strong configuration. The hourly chart shows a breakout support now at 9580 which is also an old pivot line from late January, whilst yesterday’s closing high at 9719 is also supportive this morning as the DAX has again opened in a positive vein. Near term resistance comes in at 9760 and 9827 prior to the key test of the Fib level. Buying into weakness seems to be working for the DAX now.

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The euro continues to fall towards what is increasingly likely to be a test of the support band around $1.0800. All the momentum indicators are corrective but with the RSI consolidating a position at a three month low and the Stochastics firmly in bearish territory the downside pressure remains. Yesterday’s candle showed less intensity to the selling, with only minor losses recorded on the day, however there is so much bearish momentum that I do not see this to be the beginning of a recovery and fully expect today’s move to continue lower., or in the least any rally seen as a chance to sell. The hourly chart simply looks to be unwinding to help renew downside potential. There is initial resistance in the $1.0890/$1.0910 band and then at $1.0960. Yesterday’s low at $1.0830 is marginally supportive but expect $1.0800 to come under pressure, with a breach opening $1.0710.

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The bulls have now managed to record two positive candles in a row as the selling pressure has just taken a pause for breath. I discussed yesterday whether I felt that the move was a possible recovery and my belief is still that I expect rallies to find significant overhead resistance in the resistance band between $1.4000 (psychological round number) and $1.4080 (the old key January low). There have now been two attempts above $1.4000 in the last three sessions and both have floundered. The momentum indicators have picked up slightly with these two positive candles but there is still a sense that they are just unwinding to renew downside potential. I do not see the Stochastics picking up as a bull move, more that they are bumping along the bottom. The hourly chart is a bit more encouraging but still, as yet there are no bullish signals, only less bearish ones and nothing that suggests any imminent buying pressure. Initial support is now in at $1.3900 with the key low at $1.3833 protecting a fall to the 2009 lows again.

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Another turn in sentiment has formed a strong bullish candle yesterday which completely negates Monday’s corrective move. Furthermore, the bullish reaction has continued today with the pair now pushing out to a new two week high. This chart is an example of where the momentum indicators have certainly been leading the recovery, as the RSI is at a 4 week high, the Stochastics rising strongly and the MACD lines have completed a bull cross. This all points towards pressure on the key resistance at 114.87 now which was the original rally high following the big sell-off. There is much resistance up there though with the 38.2% Fibonacci retracement at 115.07 adding to the barrier to gains, however the momentum in the recovery is now building. The hourly chart shows positive configuration on the momentum and the move above the near term pivot at 113.15 gives a decent support band now. Buying into any intraday weakness today is the strategy.

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The lack of conviction in the momentum indicators could be coming to haunt the rally in gold now as the three week uptrend again comes under pressure. A slightly bearish candle yesterday ($6 down on the day) has continued to slide again today and the uptrend, currently around $1221, is set to come under threat. However it is the gradual deterioration in the momentum indicators that have been my main concern for a few days now and this move continues. Could it be that the momentum is leading gold lower (just as it is leading Dollar/Yen higher)? The hourly chart shows trading below all the moving averages, hourly momentum is neutral at best now, and a slide in the price has set in near term.  There is near term resistance at $1236 now whilst the support at $1217.60could come under pressure prior to the key near term low at $1211.20. A close below the 3 week uptrend on the daily chart would confirm the loss of bull control.

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In the context of the moves we have seen over recent weeks, yesterday’s trading was remarkably subdued. However, this did not prevent oil from posting another solidly positive candle which reinforces the support for oil up at these levels. The momentum indicators remain strong on the RSI now pushing up towards 60 and the MACD lines close to pushing into positive territory and the Stochastics remain strong. The longer term traders will also be noting that WTI is also putting pressure on the massive 21 month downtrend which has been in place since the original sell-off in gold began from around $107 in June 2014. Furthermore, with Brent Crude already having broken above its equivalent resistance at $36.25, the key rally high at $34.80 remains a resistance which WTI needs to break through for the bulls to really gain some traction. So WTI is at an interesting crossroads, with the price also bumping at the resistance of the neutrally configured 2.0 Standard Deviation Bollinger Bands. Initial support is $32.30 with the 144 hour moving average still also a basis of support at $32.80.

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