11/08/2014: Improving sentiment helping equities rebound as the euro prepares for a rally

Market Overview

Markets are looking to move out of correction mode and back into recovery mode now. A strong rebound was seen on Wall Street on Friday (with around 1.2% or 22 points added to the S&P 500) which came on the news that Russian troops were apparently pulling back from the border with Ukraine after completing a week long “war games” exercise. Furthermore the US said that it had hit arms targets in northern Iraq with its air force. Asian markets bounced strongly overnight too after Chinese CPI inflation came in at 2.3% and gives room for the Peoples’ Bank of China to ease monetary policy further if required. The Japanese Nikkei 225 has bounced 2.4%, also helped by a weaker yen as geopolitical tensions have eased slightly. European markets have bounced strongly in early trading.

Forex trading has had a bit of a messy outlook in Asian trading, although there is still a slight bias towards the dollar today, with the euro, yen and Swissy correcting recent strength. There is little economic data to drive markets today, aside from the housing starts from Canada.

Chart of the Day – EUR/GBP

For traders that like to look for reversal signals, Euro/Sterling will now be very interesting. The sharply positive move on Friday took the rate above £0.7985 which completed a 5 week head and shoulder base pattern which gives a near to medium term target of £0.8115. Looking at the momentum indicators there has been a definite improvement in the outlook with the formation of the pattern. Both the RSI and Stochastics are at the highest level since March. Also the 21 day moving average which had been acting as the basis of resistance throughout a 3 month period of selling, has now turned higher at £0.729 and is now looking to be used as the basis of support. The intraday hourly chart shows that the rate has just drifted back in the past few hours and this could mean that a near term buying opportunity arises. There is a good band of support now at £0.7940 but the pattern would remain intact until a breach of £0.7900.

EURGBP   11082014

EUR/USD

I have been talking about the signs of a technical rally on the euro for the past few days and now the signs are becoming increasingly strong that a near term bounce is ready to come through. Friday’s strong session for the euro has now meant that there has been a bullish divergence on the 14 day RSI (ie. a lower low on the price combined with a higher low on the RSI – denoting a loss of downside momentum) with a failure swing. This positive signal has been bolstered by a confirmed buy signal on the Stochastics which are now advancing again. That suggests that the weakness in the early Asia session could be seen as a chance to buy. The intraday hourly chart shows a small base pattern and that the rate has simply unwound back to the support band $1.3390/$1.3400. I am now expecting the euro to mount some sort of recovery probably back towards the neckline resistance band of the big 8 month top pattern at $1.3475/$1.3500. A move below the recent low at $1.3331 would abort the rally.

EURUSD   11082014

GBP/USD

For the moment, the 4 week correction is now stopping. The downtrend that has been dragging Cable lower continues, whilst the rate seems to continue to be on course for a retest of the support at $1.6737 and more importantly $1.6690. Unlike with the euro, there is very little, if any, sign of a recovery for sterling for now. The only thing that the bulls can be hanging on to is that the RSI is once again below 30 which should mean that straight line downside potential is becoming limited here. However, the intraday hourly chart shows al hourly moving averages falling in bearish sequence, whilst any rebound in momentum indicators is just a case of unwinding a near term oversold position before further weakness comes through. There is a minor band of resistance $1.6810/$1.6825. The resistance of the downtrend on the daily chart comes in at $1.6840 however the negative near to medium term outlook would remain in place until a breach of the small reaction high at $1.6890.

GBPUSD   11082014

USD/JPY

The elevated volatility has continued and may now have indicated another near term turnaround as Dollar/Yen trades within this range over the past few months. A bullish hammer candlestick was formed on Friday as the dollar recovered from 101.50 to bounce above 102.00 once more. The price action in the Asian session has been fairly sedate with a bullish bias and already there has been a move above the previous day’s high which has not been seen over the past 3 days and could reflect a near term improvement once more. A move above 102.30 which is the basis of resistance would also now add to the improving outlook. Momentum indicators are not too helpful at the moment, with a neutral configuration and the price mid-range. The intraday hourly chart shows the bounce, but there needs to be a push above the 89 hour moving average (currently 102.19) to continue the recovery.

USDJPY   11082014

Gold

You could almost write the headlines on the geopolitical conditions just from looking at the gold price now. A drift off in gold has once again coincided with an apparent slight calming of tensions with Russia. The move that started on Friday has continued with a small element of weakness today. The has strengthened the resistance of the reaction high at $1324.44 with a slightly lower high now at $1322.60. Any concept of trend has been broken as the choppy outlook continues. Now the bulls need to be wary of the support at $1301.75 which protects from a near term top pattern forming. In reality though, holding on to the $1300 mark will be the psychological concern, a level which also now coincides with the rising 144 day moving average (which comes in at $1299.90). Due to the choppy nature of the recent trading phase, momentum studies are not a reliable indication, with them very neutral once again.

Gold   11082014

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