10/10/2014: Volatility spikes as the bears roar again

Market Overview

Volatility has been increased incredibly in the past few days as traders and investors have struggled to come to terms with an unexpectedly dovish Federal Reserve and the ongoing economic slowdown that is hitting key markets in Europe and Asia. Having seen its biggest one day advance of 2014 in the previous session, Wall Street saw an enormous turnaround, with a 2% decline on the major indices. This has sent the VIX Index (which measures volatility of S&P 500 options) 24% higher to 18.7 which is the highest level since February. It appears that although the era of cheap money is not coming to an end any time soon, the economic slowdown and factors such as Russia, ISIS and the Ebola virus means that volatility is likely to remain high in the coming weeks and possibly months.

The S&P 500 closed 2% lower on the day, sending Asian markets sharply lower, with the Nikkei 225 off by 1.2%. European markets which ended with an incredibly disappointing close last night, have opened with further sharp losses again today.

In forex trading, there is less pronounced direction than equities, but the dollar is again finding a bit of strength once more against the euro, sterling and the yen, although not by much. Traders will not have too much economic data to go on today, with the UK trade balance at 09:30BST (-£9.6bn expected) and Canadian unemployment at 13:30BST (7.0% expected). However there are a raft of central bankers from the ECB and the Bank of England speaking throughout the day, in addition to four Fed members (Plosser, George, Fisher and Lacker) who could all have an impact on the markets.

Chart of the Day – NZD/USD

The Kiwi has been under pressure since peaking at 0.8835 in July, with a downtrend forming. The price accelerated lower in late September but has since formed support at 0.7707 (which was just above the critical Q3 2013 lows around 0.7680). A second low at 0.7712 meant that the prospect of a base pattern was open and this duly completed yesterday on the move above the resistance at 0.7925. The move gives an implied target of around 0.8100. With the falling downtrend resistance currently around 0.8070 this would be in keeping with a bear market rally. The momentum indicators are beginning to improve but not in a drastic manner, seemingly just unwinding the oversold momentum. The intraday chart shows yesterday’s move lower has looked to form support around a band of old resistance at 0.7860 and as long as the higher low at 0.7780 remains intact the base pattern will still be in force. I expect this to be just a near term rally and would anticipate the bears to regain control in due course.

NZDUSD   10102014

EUR/USD

The euro recovery came into question yesterday as what had looked to be another strong day for the single currency was turned on its head into the afternoon and the sellers took hold once more. However the intraday hourly chart shows that not all is lost and in fact this move has just been a pullback to the neckline of the 8 day base pattern around $1.2700. So this becomes an important moment for this recovery. Can the euro bulls hang on? The reaction overnight has been positive, and whilst the higher lows left at $1.2582 and $1.2621 remain intact the chance of a recovery towards the $1.2900 implied target from the base will still be there. The daily chart is not as positive as the intraday chart, with daily momentum indicators still just having a look of unwinding an oversold position. My expectation is that is the higher lows can hold on the intraday chart then a near term rebound could be on. However I remain a bear in the medium term and would expect the bounce to fall over probably under the implied target (as bear market rallies tend to undershoot their upside targets before the sellers resume control).

EURUSD   10102014

GBP/USD

The near term sterling outlook is not as positive as the euro. The intraday chart shows no reversal pattern and the daily chart just shows a rebound to the downtrend that has been in place since early July. Yesterday’s late sell-off has done little to improve the daily momentum indicators which remain in bearish configuration and suggest selling into strength. The trendline currently comes in around $1.6220 and there is room for around 100 pips of upside whilst still remaining bearish. Yesterday’s key reaction high at $1.6226 is clearly now the resistance, however the intraday chart does show some initial support around $1.6100. The key near term support comes in at $1.6023. In the near term I am more technically bearish on Cable than I am on EUR/USD and perhaps with the volatility in the markets a hedge could be used with a short Cable/long Euro to mitigate some of the risk?

GBPUSD   10102014

USD/JPY

After three days of trying, the breakdown of the consolidation has finally had its confirmation with a close below 108.00. This is just another signal that suggests a near term correction is underway. The intraday hourly chart already shows resistance forming around the 108.00 old support. The daily momentum indicators are all in reversal mode now with the sharp fall in the Stochastics and MACD also falling. The rate which has now seen lower highs and lower lows on the daily chart for the past 3 days is now on the slide. Theoretically the breakdown implies a move back towards 106.00, but I see this as a bull market correction which tend to undershoot the downside targets before the buying pressure resumes. I see a move back towards the initial support which comes in the band 106.80/107.40 as a chance for a medium term buy. The corrective outlook will remain intact until a move above the 108.73 reaction high from 8th October.

USDJPY   10102014

Gold

The strength of the bull run in the last few days has seen a $50 rally in the gold price in just 4 days. This is an impressive showing by the bulls, but there is still little that has changed on the daily chart. The price continues to trade below the key medium term resistance at $1240.60 whilst the momentum indicators are still just unwinding the oversold position. In fact with the bearish medium term outlook intact we are now into the zone of looking for the momentum sell signals again. A failure of this rally under $1240.60 would suggest the bounce has lost momentum. The move from yesterday has already turned lower at $1233.20 which is under the minor rally high at $1234.80. Yesterday’s candlestick pattern was also fairly disappointing for the bulls, well below the mid-point in the day and already giving suggestion that the bulls were beginning to lack conviction. That makes today’s session important in order to claw back some of the initiative. The intraday chart shows a basis of support around $1220 now and if the gold price begins to consistently fall below $1220 then the near term rebound would be under real pressure. The key near term support is at $1204.62.

Gold   101092014

WTI Oil

The strength of the selling pressure is growing. The daily candlesticks show solid downside pressure through the day as WTI continues to fall and now taking the price below the November 2012 low at $84.04 too. This now means that there is actually very little support now until the June 2012 critical low at $77.28. The one saving grace that the bulls may point to is that the RSI is now back below 30 (currently 26) which is a level around which previous sell-offs have run out of momentum. However this is a very thin argument that the bulls cling to with the MACD and Stochastics lines all in bearish configuration and showing no let-up in the bearish momentum any time soon. The intraday hourly chart shows little to cheer about either for the bulls with the sequence of lower highs still dragging on the price, with a minor intraday rebound high at $85.77 and yesterday’s high at $87.95 acting as resistance. Using any intraday rebound as a chance to sell remains the best strategy.

WTI   10102014

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