The weakness on the dollar yesterday facilitated a significant turnaround in oil and gold, both of which had been under significant pressure until an amazing rebound for both. The bull runs on equity markets have come under a bit of scrutiny for almost the first time as the manufacturing PMI data for China and the Eurozone did not paint a rosy picture. Only the UK and US were really able to show positive signs. Wall Street closed in the red with the S&P 500 down 0.7%. Asian markets were mixed again, but the Nikkei was stronger once more due to the weakness of the yen. European markets have opened mixed to slightly higher today.
In forex trading, the US dollar is looking to regain some of the lost ground that it saw yesterday and is trading positively against most of the major currencies. There is one notable exception, and that is the Aussie dollar which has managed to maintain a bit of upside momentum following yesterday’s intraday rebound. The reaction to the statement of the Reserve Bank of Australia’s monetary policy has been to guide slight Aussie dollar strength, even though the central bank was looking to talk the Aussie lower.
There is not a huge amount on the economic calendar and certainly if there is going to be a quiet day this week, today will be today as for the remaining three days traders will be bombarded by a raft of key data. The UK construction PMI is released at 09:30GMT and represents around 7% to 8% of the UK economy, with the expectation of a slight slide to 61.1 from 61.4. Other than that we are set to have speeches from a couple of Fed members with Yellen and Fischer (both doves) on the agenda today.
Chart of the Day – AUD/USD
At first glance the outlook for the Aussie dollar remains under pressure. Yesterday’s rebound had threatened at one stage to leave the chart with a powerful hammer reversal signal, however a late drift lower suggested the bulls were not yet ready for a recovery. However, overnight there has be some supported buying and the Aussie has held up again (amidst selling pressure across other forex majors). It is on the intraday chart where the interest picks up for the bulls as there is the potential for a small inverted head and shoulders pattern that could signal a near term recovery after all. With support formed around 0.8470 overnight, a consistent break above the resistance at 0.8540 would complete the pattern which would give us an upside target of 0.8660 (be careful though as bear market rally targets tend to undershoot). Hourly momentum is certainly showing signs of improvement. A breach of 0.8470 would defer the pattern and simply continue the downside back towards 0.8416.
Once more the resistance of the 3 month downtrend was tested yesterday and once more it held firm. However as these tests become ever more frequent it would appear as though the bulls are really testing the bearish outlook. All the momentum indicators are suggesting that rallies are a chance to sell and there is nothing yet that has happened on the daily chart that changes that view. However with the sideways trading band over the past few weeks still intact the bulls are seemingly not giving in easily at the moment. The intraday hourly chart shows a series of hourly moving averages which are broadly sideways now and momentum that is neutral and reflects the consolidation. Today once more becomes an important session for the near term outlook. A breach of yesterday’s high at $1.2506 (once more around the $1.2500 pivot level) would open an immediate test of $1.2530 but also start breaching the 3 month downtrend. Support comes in at $1.2418.
Yesterday’s rally has formed a bullish outside day, although just failed to complete a bull key one day reversal as it missed closing above $1.5741 by just over 10 pips. However, for now there is not a great deal that the bulls have achieved other than simply enabling yet another rally that will be sold into. The four month downtrend remains intact (today c. $1.5850) and very little impact has been made on the momentum indicators. Looking on the intraday hourly chart yesterday’s move has run out of steam at $1.5763 and a drift lower has begun. There is a very near term pivot level around $1.5720 which can be seen as an early line in the sand and if the drift starts to trade consistently below this then with the hourly momentum indicators turning lower, it could result in the bears gaining control once more for a retest of the $1.5600 support area. A break above $1.5763 would re-open a rebound, but rallies are still being seen as a chance to sell.
Despite yesterday’s intraday correction the outlook for Dollar/Yen remains positive. I noted in my daily videos yesterday that I saw corrections into the 117/118 support area as a chance to buy. Having seen a dip back from another multi-year high at 119.13 the weakness of the dollar dragged the rate sharply lower. However support has formed at 117.86 which was well above the key support low at 117.22. Also interestingly the hourly RSI unwound to hit 30 just as it had done for the key low at 117.22, which would also suggest that the bulls remain in control. The bulls seems to regaining confidence overnight as Dollar/Yen has started to push higher again. I see further pressure on the high once more and any further dips as a chance to buy.
I have spoken previously about the volatility that was likely to be seen in the days following the Swiss Gold referendum, but I was not prepared for the huge intraday move that was seen yesterday. A complete turnaround in the outlook for gold with as much as a $79 intraday rebound on gold has left an enormous bullish key one day reversal. From hitting a low at $1142.90 the gold price subsequently rallied to just below the resistance at $1221.70. The question is what to do now? Well, I do not believe that we have seen the last of the volatility quite yet. There is an initial basis of support in the area around $1200/$1208 whilst it is also important for the bulls to hold on to the pivot level at $1180.70. As the exuberance of yesterday’s rally subsides it will be interesting to see if the bulls can sustain the momentum.
I mentioned yesterday about the potential for a snapback rally on oil. From the low of $63.72, the WTI price has since bounced by over 7.5%. The RSI is quickly unwinding but is currently still at 30 which suggests there is still room to unwind. The interesting point of note is that the technical breakdown target of $64.60 from the bearish break of the 7 week downtrend channel has now been achieved. Yesterday’s session was also outside the Bollinger Bands, this would suggest that if the WTI price closes inside the Bollinger Bands today this could create the conditions for a further rally. With the last two days coming on strong volume there is a feeling that the selling pressure has reached capitulation stage on Friday and a rebound could set in near term. The initial resistance still does not come in until $73.25. The period of high volatility is set to continue for now.