04/06/2014: Caution starting to erode equities as the dollar remains in favour

Market Overview

Markets have become increasingly cautious as the week has progressed. This is in front of what could be a potentially profound ECB monetary policy meeting and not forgetting Non-farm Payrolls. The Dow, S&P 500 ad NASDAQ all closed very slightly in the red with the lack of risk appetite also evident in Asia. Even a continued weakness in the Japanese yen could not encourage the bulls of the Nikkei 225. This caution has filtered through to the European markets where investors have been hesitant for the past couple of days as debate rages over how the ECB will act.

Forex trading has once more taken on a dollar positive view as the Dollar Index climbs once more. The early trading after the Asia session shows the euro, sterling and the yen all under pressure. Today’s data is dominated by the services PMIs, with the UK due at 09:30BST (expected to fall slightly to 58.2 from 58.7). Trades will be hoping there is no repeat of The Institute of Supply Management’s double revision fiasco from Monday when it announces its Non-manufacturing PMI for the US at 15:00BST (expected to improve slightly to 55.5 from 55.2). There is also the ADP Employment report set to be announced at 13:15BST which is expected to show +208k jobs for May, slightly lower than the +220k jobs for the previous month.

Chart of the Day – DAX Xetra

The prospect of a correction is growing. Having hit the all-time high in the early minutes of Monday’s trade the DAX has been sliding ever since and yesterday breached the reaction low of 9898 to post a 6 day low. The unwinding of the index back towards the support of the six week uptrend (which comes in at 9755) has always been likely, whilst also a pullback to the breakout level at 9810 has also yet to be seen. A decline would be healthy for the medium term and would help to validate the breakout if support around there can be achieved. Daily momentum indicators show a near term stretched position too. All of this points towards a correction of around 100/150 points over the next few days. It is then that we will be able to reassess the outlook for the bulls.

DAX   04062014

EUR/USD

Sell on rumour, buy on fact. That seemed to be the strategy for yesterday after the Eurozone CPI data undershot expectations. The daily chart has subsequently taken on more of a consolidation look to it. For several days now the rate has bumped along in around 60 pips of range higher and lower. The momentum indicators have begun to show signs of early stage improvement, but nothing yet to get excited about as they all still remain in negative configuration. The intraday hourly chart threatened a base pattern yesterday, needing a move above $1.3649 resistance, a move that failed to be completed. So near term the Euro is rangebound still, with hourly moving averages now rather neutral. My preference is to sell into strength for a retest of the $1.3585 low, but this range seems to be set now at least until the ECB announcement tomorrow.

EURUSD   04062014

GBP/USD

We focused previously on the mixed signals after the 7 month uptrend was broken but the 89 day moving average held. Now as a minor recovery has fallen over, the 89 day ma (at $1.6694) is once more under threat. Momentum indicators remain corrective and a test of the key support at $1.6680 could easily be seen now, with a breach confirming the outlook has changed to negative. The intraday chart shows that yesterday’s failure at the key $1.6780 resistance was key and the pressure is mounting to the downside in early Asian trading today. There is a test of the minor support band around $1.6720 underway and a decisive breach would open the key medium term support at $1.6680. Hourly momentum does not look too favourable for the bulls and it now looks as though rallies are being seen as a chance to sell.

GBPUSD   04062014

USD/JPY

The dollar rally continues as the outlook continues to improve. Daily momentum indicators are becoming ever more positive and moving averages are beginning to turn bullish again. If the pair can successfully negotiate the next  key overhead resistance levels then the medium term outlook will improve drastically. The underside of the 144 day moving average at 102.60 is being paid scant regard, however the underside of the old primary uptrend (currently 102.81 could be more difficult and has already been a barrier overnight. The improving outlook now suggests that weakness is being bought into and a test of 103.02 is likely in due course. The hourly chart shows a reaction low at 102.24 is the initial support, with the pivot level around 102.00 always there.

USDJPY   04062014

Gold

I talked yesterday about the very early signs of support and throughout the day this has proved to be correct. The posting of a “doji” candlestick pattern on the daily chart (opening and closing around the same level) suggests an uncertainty with the trend (which has been decisively down until yesterday). This is being followed up by support coming I again today. Momentum indicators are still oversold, with the RSI still below 30 (the lowest since June 2013) and now threatening a buy signal. Looking at the intraday hourly chart it shows a consolidation with the support at $1240.61. However the strategy would probably suggest that the bears are simply resting. I would still view any rallies above initial resistance at $1251.10 would still come under selling pressure once again with key overhead resistance at $1260.05 and $1268.24. There just may be a better time to sell higher up.

Gold   04062014

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