Ever since the FOMC meeting last week put the blame on “international developments” as to why the Fed did not raise rates, traders have been looking towards the Caixin China flash Manufacturing PMI as the first key data point of note. Concerns over the state of global growth in recent weeks have been exacerbated by a slowdown in China in recent weeks and today’s release will do little to calm the nerves. The flash PMI has fallen to its lowest level since 2009 at 47.0 and well below the 47.5 (and improvement from last month’s 47.1 that had been expected). Market sentiment is taking another leg lower on the back of this news. On the back of an already disappointing day’s trading yesterday with the S&P 500 off 1.2%, Asian markets have been strongly lower across the board whilst European indices are mixed in early moves as the French manufacturing PMI has surprised to the upside. The reaction on Treasury yields today could be a key driver of how far the negativity spreads as there was a huge shift lower in yields yesterday which seemed to be a part of a broader safe haven play.
In forex markets the dollar is now testing some extremely important near term levels against the euro and sterling, whilst the yen is strengthening once more amid the safe haven drive. Gold and silver have formed some sort of support, whilst the sharp weakness on the Aussie and Kiwi reflects the concerns over China.
The flash PMIs continue through the morning with the Eurozone counties each ready to show the impact of the China/emerging market slowdown with a slight retreat in the Eurozone-wide data for both manufacturing and services. The US flash manufacturing PMI at 1445BST is though expected to be stable at 53.0, whilst Mario Draghi is due to talk before the European Parliament at 1400BST and it will be interesting to hear his views in the wake of the Fed decision. The US oil inventories are at 1530BST which are expected to show another small drawdown of -1.0m barrels.
Chart of the Day – EUR/JPY
I have spoken about Euro/Yen recently and looked at the outlook in the context of an ongoing rangeplay. However, this outlook is once more coming under pressure after three consecutive bearish candles have again bolstered the resistance around 137. The concern is that the selling pressure will now once more test the old support at 133. The negative momentum is building up as the Stochastics are falling sharply and the RSI is in decline but also has further downside potential. The key neckline was previously at 133.00 and although this was slightly breached, this is still a key level of support that has already been tested today and although there has been an initial bounce, the pressure remains to the downside. The intraday hourly chart shows a top pattern formed on a move below 135 (which becomes immediate resistance) that implies a target of the old 132.50 but also if the selling pressure continues, the reaction low at 132.10 could also be tested. The hourly momentum indicators are bearishly configured and would suggest that selling into the early strength is the way to play this now. There is initial resistance at 134.65 before the resistance of the old support at 135 kicks in once more.
After a third big bearish candle, the euro is dropping is once more making another test of the key medium term pivot band $1.1050/$1.1100. The technical outlook is once more deteriorating on a near term basis as the Stochastics are falling sharply and the RSI is at a 6 week low. The overnight test of the pivot band has so far held up amid a slight consolidation, however, looking at the hourly chart there is not too much for the bulls to get excited about yet. The hourly momentum indicators may have just picked up a touch but there is still an overriding bearish configuration. Rallies are now being sold into and there is a resistance band $1.1155/$1.1205 that will be seen as a chance to sell. Only a move above the reaction high would improve the chart to an extent that a recovery can be thought about. Aside from that the charts are favouring further downside pressure on the pivot. A move below the reaction low at $1.1085 opens $1.1015.
I spoke about the prospects of a small top pattern forming yesterday and a move back towards $1.5330 but I did not expect it to be all in one day as the bears really took hold. This has left an extremely bearish candle on the daily chart and momentum indicators are beginning to take on more of a corrective look to them again, with the Stochastics especially now falling sharply. This support at $1.5330 is key to the near term outlook as this was a historic level from the July low which once more came in as support for a recent key reaction low. A failure of the support would certainly turn the outlook within the broad sideways trading range negative once more and open the key lows around $1.5170. So far today in the Asian session the support has held up but the pressure is on with the hourly momentum indicators more negatively configured than they have been since the first week of September and the pressure remains decidedly on the downside. A breach of $1.5330 opens $1.5265 initially and then the key low at $1.5170. There is a minor reaction high at $1.5385 which is the very least that the bulls will need to breach today to begin to turn around the near term outlook.
Another day, another yen reversal as the choppy trading conditions continue. I may as well just give up talking about the momentum indicators which have become neigh on useless in their consolidation that comes within a slight negative bias. Once more I will be forced to talk about going with the overnight direction which is negative and subsequently a possible retest of the 119.03 low. However if the trading sequence of the past couple of weeks continues then the price is likely to just flip on a six pence and turn higher again. Dollar/Yen remains a dreadfully thankless task to analyse at the moment as the signals and trends are so indecisive. I do favour short positions for a test of 119.03 and perhaps back towards the range lows around 118.30 put perhaps wait for an intraday rally before enacting that strategy. The resistance comes in at 120.30 whilst the bulls would be in control near term above 120.65 resistance.
It would appear that I was right to be looking out for the next sell signal as gold has followed the three strong bull candles with two strong bear candles. The big downtrend resistance never seems to quite have been tested as the rolling over has set in. The Stochastics momentum has now crossed over and although this bearish cross has been seen below the 80 level, but I am allowing for this with gold being in a bear market and it is a similar signal to the one that preceded the late June sell off. Looking on the hourly chart, I spoke of the selling pressure mounting should the support of the reaction low at $1126.90 be broken as it has been. This now means that a series of lower highs is in place in the past few days and little intraday rallies should be seen as a chance to sell. The latest reaction high was at $1136.40. Hourly momentum indicators confirm the deterioration in the outlook and also that rallies which allow the momentum to be unwound are a good selling opportunity. The initial resistance is around $1130. I expect a continued retreat back towards a test of the next low around $1115.
The daily chart shows that the messy consolidation continues with the wild swings on a day to day basis continuing. An argument could be made that the consolidation is actually getting tighter within the band $43.20/$$49.35 with tighter support coming in at $44.25 and resistance in at $47.70 means that these are two levels that should now be watched. Interestingly the 21 day moving average (currently around $44.90) is now rising and has actually provided support over the past 2 weeks so this could be another signal to watch on the downside. Daily momentum indicators are indecisive within this consolidation but we still have the Stochastics falling which has to be a concern for the bulls. The risk still remains to the downside and a test of the $43.20 range low.