Risk appetite has rebounded significantly in the past few days but what are the drivers. The rally (or should that be short squeeze) in the oil price continues, with WTI now up over 18% off its lows and Brent Crude well over 20% higher (and in official bull market territory). Also with the new Greek government finding a few allies across Europe (notably France) in its quest for renegotiation of its debt, but also coming up with a plan that avoids haircuts for its bondholders, the market has responded well. Both of these factors have contributed to the improvement in sentiment with equity markets rebounding strongly and forex major such as the euro gaining ground.
On Wall Street there was a second consecutive strong day with the S&P 500 up 1.4%, with the performing feeding through into the Asian session with the Nikkei 225 up 2%. European markets are following up a positive session yesterday with a mixed performance today. It will be interesting to see what happens if the FTSE 100 challenges its 6905 key multi-year high which has proved to be such a significant barrier during previous rallies.
In forex trading, there is a slight reversal of yesterday’s moves so far, with the euro and sterling losing some ground. The commodity currencies (Aussie and the Kiwi and Loonie) have also reacted higher as commodity prices have begun to improve.
Traders will be looking out for the service sector PMIs which are released throughout the day. The Eurozone numbers come through the early morning, whilst the UK data (which comprises around 75% of the UK economy and should therefore have an impact on sterling) comes out at 0930GMT and is expected to improve slightly to 56.6 from 55.8 last month. The US ADP employment report begins to turn attention to Non-farm Payrolls on Friday, with the data release at 1315GMT with a slight dip to 224k expected (down from 241k). The ISM Non-manufacturing PMI is at 1500GMT and is expected to pick up slightly to 56.6 from 56.2.
Chart of the Day – EUR/JPY
The chart is interesting because we are getting conflicting signals across different time frames. The daily chart shows the euro rallying to a 7 day high and above a consolidation band which had limited its advances to 134.35 in the past week. However, the pair is now back to the key resistance of the old support around 135 which means that this is a key moment now for the bulls. They will though be encouraged by the momentum indicators, all of which are suggesting a technical rally is now on. Having already seen bullish divergences on RSI and Stchastics, both indicators are now rising strongly, whilst the MACD lines are just in the process of completing a bull crossover. However, the intraday hourly chart could be a near term stumbling block, with the posting of a series of near term signals (MACD bear cross and Stochastics sell signal) all around the 135 resistance. This could mean that we see a slight decline in the pair back towards the support 134/134.35. This would then be a test of the strength of the bulls who need to see a confirmed breach of 135 to suggest the rebound has legs in it.
The euro made considerable ground to the upside yesterday as the consolidation has turned more towards a technical rally. Technical indicators on the daily chart back a continued rebound too, with the RSI at a 6 week high, the MACD lines having crossed over and the Stochastics gaining strongly now. The rebound is now into the next band of resistance which is between $1.1460/$1.16.75.The intraday hourly chart is showing a minor pause for breath after yesterday’s upside, whilst the hourly chart shows a shooting star candle yesterday afternoon which suggests a little bit of near term exhaustion. I would now be looking for support to form, with the previous breakout band $1.1380/$1.1420 a decent start. The recovery bulls have made a good fist of the recovery so far, ideally there needs to be some markers left on the trail, and the posting of a higher low would be of benefit now. Above $1.1530 continues the upside.
With the euro rallying, the dollar has come under some corrective pressure and this is helping to drag Cable higher. The trading day yesterday has in no small way improved the outlook for sterling. A bullish engulfing candlestick (bullish outside day bar) has improved the sentiment of the chart taking Cable above its 21 day moving average and although there is still much to be done for the bulls, this is a good start if there is going to be a technical rally. The momentum indicators have also taken on more of an encouraging set-up. The daily RSI is at a six week high, with a hint of a bullish divergence, the MACD lines are now beginning to improve and the Stochastics are also improving. The intraday hourly chart shows once again that the resistance around $1.5200 is the barrier that the bulls need to break through to suggest further gains can be achieved, and yesterday the peak came at $1.5196 before leaving a negative shooting star candlestick. This suggests that if the bulls can break through $1.5200 and sustain the break, then we can begin to seriously think about this as a rally to back. Above $1.5200 opens $1.5270 and then $1.5320. Support is now in the band $1.5100/$1.5135.
After showing signs of a downside break the daily chart has formed a couple of rather indecisive candlesticks in recent days. It seems as though the sellers are still unsure whether to back the yen strength required to pull the pair decisively below the old support around 117.20. Momentum indicators remain rather mixed in configuration and moving averages broadly flat, although having for two weeks traded around the 23.6% Fib retracement at 117.90, the pair is now consistently below, which is a concern for the bulls. The intraday hourly chart has slightly improved overnight, however the old pivot level around 118.00 seems to have once again acted as a ceiling. On the bright side though the 117.20 support came back into force yesterday to provide a near term floor. It looks as though there is still an element of slight bearish bias to the chart despite yesterday’s gains and consistent failure to break back above 118 would heap the pressure back on 117.20 again. Above 118.00 re-opens the range high of 118.87.
I wrote yesterday about the corrective downtrend coming under pressure and that if a confirmed breach of $1285 could be seen then the bulls would regain the initiative. This could not quite be seen and the corrective outlook continues. In fact, yesterday’s decline subsequently formed a bearish outside day which suggests there is an appetite for some downside again. I have previously discussed the medium term buy level which I see around the $1252/$1255 area and once again yesterday’s low has come in at $1255.20. This is also around the support of the 38.2% Fibonacci retracement of $1168/$1306 at $1254.The momentum indicators are still corrective but equally just unwinding the bullish overbought position. Interestingly, on the hourly chart the MACD lines have just given a bullish crossover and this could be a sign of support again. It looks like the gold chart is becoming increasingly choppy near/medium term as the building process for a medium term low continues. Resistance once again around $1272 which is becoming a pivot level.
The outlook for WTI has improved dramatically in the past four sessions, with a rally of over 18% from what could now be a key low at $43.58. It is still far too early to say whether the oil price has bottomed but the bulls have made some serious breakthroughs. Trading above the 21 day moving average, breaking the old downtrend resistance and an intraday move above the $51.27 15th January high. The RSI is also at a 4 month high and close to a 6 month high. The intraday hourly chart shows that the bull flag target of 51 has been achieved but that does not appear to have halted the rally which has seen a close above the $51.27 high and which is now hugging the 21 hour moving average on the intraday chart. If this short squeeze continues there is little reason why the next resistance band $53.60/$55.10 cannot be tested. Support has now been left at $48, $49 and $49.75.