10/12/2014: Markets looking to stabilise after high volatility yesterday

Market Overview

Sentiment in Asia continues to be hit by data coming out of China. Inflation in the world’s second largest economy continues to fall and suggests that the economy is slowing down. The announcement of CPI at 1.4% was below the 1.6% forecast by the consensus, whilst Producer Price Index also fell by 2.7% which was lower than the 2.4% decline forecast. This means that there will be a big decision for the People’s Bank of China to make as to whether or how to further ease monetary policy.

The reason that Asian markets were able to broadly stabilise overnight, was that they were helped by a late rebound on Wall Street, which left the S&P 500 basically flat on the day (having been well over a percent lower). Despite this though, the Nikkei was 2.25% lower on the stronger yen and disappointing Japanese manufacturing data. The European indices are showing a little bit of fight in early exchanges, looking to retrace some of yesterday’s sharp losses. However, the bulls will need to hope that focus remains on the late rally in the US rather than the Asian data (which drove losses on Monday and Tuesday).

In forex trading, the US dollar remains under a little bit of pressure, trading weaker against all the major currencies and interestingly is down the most against the yen again this morning. The Japanese yen (along with gold) was the safe haven asset of choice yesterday and both are once more trading positively today, to suggest that the market has not entirely settled yet.

Traders will be looking towards the October UK Trade Balance at 09:30GMT which is expected to improve slightly to -£9.5bn (from -£9.8bn in the previous month) and could certainly move sterling. The only other major data release concerns the Kiwi dollar with the Reserve Bank of New Zealand announcing monetary policy at 20:00GMT. No change is expected on the 3.5% rates.

Chart of the Day – USD/CHF

You have to view Dollar/Swiss as the inverse correlation to the Euro/Dollar chart. The Dollar/Swiss chart has been in a solid and well defined uptrend since August and much as EUR/USD is testing its downtrend (see below), Dollar/Swiss is pulling back to test its uptrend. Yesterday’s spike low hit 0.9652 which was almost to the pip the support of the uptrend (which today comes in around 0.9675). Although the uptrend survived yesterday’s assault, the indicator is once again under pressure today. Interestingly, although the RSI and MACD lines remain firmly in bullish configuration, a sell signal on the Stochastics has now crossed back below the 80 line to confirm the signal. This is just one signal but could be a harbinger for more. So we must wait to see confirmation on other indicators, especially with the uptrend still intact, but the downside pressure is growing again. A breach of the near term support at 0.9646 would be a further signal and actually complete a double top on the intraday hourly chart. A move above 0.9778 would improve the outlook again.

USDCHF   10122014

EUR/USD

The sharp move against the US dollar has meant that there has been a rally on EUR/USD which is now once more testing the resistance of the downtrend. The initial move yesterday peaked at $1.2447 hitting the downtrend almost to the pip before falling away again. However the euro bulls have managed to sustain the pressure so far this morning and are giving it another go. So that means that with this improving near term outlook, the latest move will be considered to be quite important. If, after the considerable pressure the dollar came under yesterday, the euro cannot break through this downtrend that has been so impressive as a basis of resistance, then there will be serious question marks over how strong the bulls are. A move above the reaction high at $1.2456 would be a one week high and begin to question the near/medium term bearish outlook. Support is now the $1.2357 floor of the triangle.

EURUSD   10122014

GBP/USD

In light of the fact that the US dollar was under significant pressure across the board yesterday, the move on Cable was fairly tepid and was unable to gain any real traction. The falling 21 day moving average at $1.5683 is still the basis of resistance and the downtrend since mid-July which currently comes in at $1.5753 has not yet even been tested. However on the intraday hourly chart there has been a mild improvement as a sharper downtrend (that dates back to late October) is under significant pressure now. Furthermore, the 4th December high at $1.5725 is being tested and if it were to be broken it would take Cable to a 6 day high. However looking at the hourly momentum indicators the move does not appear to be as assured, with the Stochastics, MACD and RSI all lacking conviction with the recent rebound. The support at $1.5625 now protects a resumption of the move lower.

GBPUSD   10122014

USD/JPY

Judging by what we have been subjected to in recent weeks on Dollar/Yen, the downside move yesterday was incredible. A daily range of over 300 pips has seen the bulls (and I was one of them) left aghast. With intraday supports failing left, right and centre, the bullish argument has been severely strained. The volatile spike lower in the afternoon which saw 135 pips lost and then almost entirely retraced in an hour did a lot of damage but did not quite breach the support at 118.76, whilst the key reaction low (also on the daily chart) at 117.22 remains firmly intact. This means that if the bulls can pick themselves up and dust themselves off, there has been no major change of outlook on Dollar/Yen. Once this volatility calms down then we can properly reassess the outlook. Early weakness today may be in the process of finding a low at 118.66 above yesterday’s low at 117.93. The resistance is near term now at 119.92.

USDJPY   10122014

Gold

The other safe haven move yesterday was a sharp rise in gold. Taking the price through the resistance at $1221 significantly improves the near term outlook and leaves several posing questions. Momentum indicators have picked up markedly in the past 24 hours, whilst the price is today now seriously testing the barrier of the big downtrend that has been pulling gold lower since October 2012 and today comes in around $1235. Can the bulls sustain this move? The RSI is at 60 and confirms yesterday’s upside break and is a good sign. The magnitude of the downtrend suggests that there would need to be a significant break to justify calling its demise, so I am now looking at the key medium term resistance on gold at $1255.20 which is October’s key reaction high, but also with the falling 144 day moving average (which has previously acted as an excellent long term gauge when gold has been trending. Yesterday’s breakout level at $1221 becomes the initial support.

Gold   10122014

WTI Oil

After spending the last week in decline and accelerating lower, although the initial move has been lower today, could it be that the WTI price has found some support? At least for the first time in a week this is a possibility near term, with yesterday posting a higher daily low at $62.54 which came above Monday’s low a $62.25. The daily momentum indicators are oversold and certainly have room to unwind if the support can hold. There is an immediate band of resistance a $64.60/$66.00 that needs to be overcome, however any bounce to the upside is still likely to merely be corrective within the big downtrend, with stronger near term resistance coming in around $67. The outlook remains bearish until a move above the key reaction high at $69.55. A failure of the near term support at $62.52 would simply re-open the $62.25 low once more.

WTI   10122014

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