04/08/2014: Markets look to settle down as the new week begins

Market Overview

Markets have just begun to settle slightly this morning after Wall Street’s worst week since July 2012, as the S&P 500 closed at its lowest level since early June. Investor nerves have been settled after the weekend announcement that the Portuguese government has a $6.6bn plan for rescuing Banco Espirito Santo which includes splitting the entity into a “good bank” and a “bad bank”. In Asia, news that the Chinese services PMI fell slightly to 54.2 from 55.0 failed to make too much of an impact with markets mixed. European trading has been supported with indices slightly higher in early exchanges.

The dollar is slightly stronger in forex trading today, but with mixed performance against the major pairs. There is little economic data due today other than the UK Construction PMI which is announced at 09.30BST and is forecast to be remain strong but drop slightly to 62.0 from last month’s 62.6.

Chart of the Day – NZD/USD

The Kiwi dollar has come under significant pressure in the past few weeks. Driven by a change to central bank policy, there has been well over 350 pips of downside in just three weeks. However there have been signs in the last couple of sessions that there may be a technical rally ready to come through. A bullish key one day reversal (an intraday move to a new low followed by a strong recovery to close above the previous high) was seen on Friday. This came with the RSI at 30 and the Stochastics also at an extreme level. The Kiwi this morning has struggled to continue the recovery, but the intraday chart also shows good signs of a bottoming of the price. There is a band of resistance around 0.8535 which was Friday’s high and if the Kiwi can start to trade through there it would suggest that the bulls are beginning to get going and could make a move on 0.8600 and then 0.8650. There is much that needs to be done still but the early signs of a recovery are there. Key support is now at 0.8460.

NZD

EUR/USD

Finally after almost three weeks where there had been little or no prospect of a euro recovery, was Friday a breakthrough day for a rally? Well, I think that the next couple of days becomes important now. For the first time in three weeks the euro has not continued lower to post a new low, which has left support at $1.3365 and furthermore, a 12 day downtrend has been breached. A bullish crossover buy signal on the RSI has been completed. However, there now needs to be a move above the initial resistance at $1.3440 which is shown on the intraday chart. This would be the first time since the sell-off began that a lower high had been breached. The intraday chart suggests there is the prospect of a recovery with hourly momentum indicators improving, but also the 89 hour moving average which had been the basis of resistance beginning to turn higher. If the euro can begin to build support above $1.3400 this would be a signal that the selling pressure was beginning to abate, at least in the near term. There is much for a recovery to do, including a significant resistance at the neckline resistance of the huge head and shoulders top at $1.3475, but for the first time in a while, the euro bulls have something to hope for.

EUR

GBP/USD

A chart of one green candle in the past thirteen completed sessions says a lot about how much pressure sterling has come under recently. The trouble is, that sterling is failing to take the lead from the euro’s rally against the dollar. The daily chart is looking ever more concerning with momentum indicators now looking very bearish and the longer term support of the 90 day moving average now having been decisively broken. With the RSI now stretched below 30 there is the prospect of a near term technical rally, but it increasingly looks as though there has been a sea change in the outlook for sterling. The intraday chart looks extremely weak and as yet there is very little signs of any recovery. A stepped decline continues to be shadowed by falling hourly moving averages, and momentum indicators in extremely negative configuration. Bouts of consolidation such as the latest one above $1.6814 continue to fall over. There is minor resistance at $1.6855 and then $1.6890. Until there is more of a sign of recovery other than the RSI being oversold, there is little argument now for a recovery and playing Cable for further downside can be the only viable strategy.

GBP

USD/JPY

Friday was another volatile day for Dollar/Yen and the correction that I spoke about came through. The low of the correction also came just around the support of the breakout from around 102.30. However, the rate remains on the volatile side today with a bounce back towards 102.80 which seems to still be acting as a level of resistance. There have been three consecutive days where Dollar/Yen has traded above 102.80 but the closing level of resistance remains, so this appears to be the basis of a ceiling. If there starts to be a close above 102.80 then we can start to think about upside breakout targets, but for now the bulls appear uncertain and do not trust a breakout. The RSI on the daily chart remains stretched at 66. However the support at 102.30 has helped to sustain the bull control near term. If there is a close above 102.80 then there can begin to be serious consideration of a move towards the April highs just above 104, however until this is seen then the range trade that has been in evidence for almost 4 months will continue.

JPY

Gold

The bulls fought back well on Friday, however there is much that still needs to be done. Across the last three weeks, gold has been leaving a series of lower highs. This has been seen in a deterioration in the momentum indicators as RSI, Stochastics and MACD have all been sliding backwards. Although Friday’s rebound took the price back above $1290, the price continues to trade now below the 144 day moving average which is a concern due to its importance as a longer term trend indicator. The pivot support at $1280 has held, but the outlook is still under significant pressure. The 21 day moving average (at $1307) has turned lower to become a basis of resistance which will be seen as a barrier to the near term gains which needs to be overcome for any prospect of a recovery to be taken seriously. The reaction so far today has been one of consolidation and the intraday chart shows the immediate resistance coming in between £1297/$1300. For now the bulls have much to do to prevent this from being another selling opportunity within this three week downside phase which is putting pressure on $1280 support. Sub $1280 opens $1258.85.

XAU

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