The oil price has been a big driver of investor sentiment in recent weeks and as the price once more slides through support the impact has been to drive traders towards safer haven plays. In the past day we have seen the classic triumvirate of falling Treasury yields, the yen strengthening and the gold price higher. Furthermore there was an 11% spike higher in the VIX Index of volatility on S&P 500 options yesterday, suggesting extra demand for downside protection from portfolio managers.
Wall Street closed down again with the S& 500 off by 0.8%. Asian markets have been mixed to lower, with the Japanese Nikkei 225 off by 0.6% as the yen has strengthened earlier , whilst Chinese stocks held up well after China trade data beat expectations and showed a decent improvement in imports (needed to suggest progress in the drive towards a consumer economy). European markets are slightly weaker in early trading, but with the FTSE 100 again underperforming due to its exposure to the oil majors.
In forex trading, it is a fairly mixed bag with none of the major really able to gain any significant traction. Cable is struggling slightly today ahead of the latest UK CPI inflation data. Inflation is expected to have dropped from 1.0% to 0.7% at 09.30GMT. However, with such considerable downside pressure on Cable in recent weeks anything above consensus could result in a snap back rally. Other than that, traders will be looking out for the US JOLTS job openings which are released at 15.00GMT which are expected to improve slightly to 4.86m. A higher number would be dollar positive.
Chart of the Day –DAX Xetra
Over the past 5 weeks, the DAX has developed into a rather well-defined symmetrical triangle. This is a consolidation pattern with converging trend lines. Momentum indicators are becoming increasingly neutral although there is a very slight positive bias to the technical set-up so it will be interesting to see if the bulls can push for an upside break. The key resistance to confirm a breakout is now with Friday’s high at 9860. It is interesting because even on the intraday hourly chart there is a n element of converging trend lines which reflects the degree of consolidation currently being seen, but there is also once more a slight bullish bias. This shows that 9601 is the near term support that needs to remain intact today is a correction takes hold, with early trading slightly lower. However, the bears would not take control until a breach of support at 9383.
I have been taking a more positive stance to these forex major pairs in recent days, talking about technical rallies, however it is perfectly possible that whilst the selling pressure has abated it is likely to simply be a near term move. Also the price action which has seen the euro add over 100 pips to yesterday’s high may well have already played out. The bulls lost some of the steam out of the rally during yesterday’s session to leave an almost “doji” candle, which means uncertainty. Also the lack of conviction in today’s Asian trading does not scream technical rally. The hesitation does not bode well for the bulls. The resistance of the old critical floor comes in at $1.1875 with yesterday’s peak at $1.1870. The intraday hourly chart shows indicators as neutral and awaiting the next move. However if yesterday’s low at $1.1785 were to be breached the bears could very quickly take hold once more for a test of the $1.1753 low. There is further resistance around $1.1900 and then key near term at $1.1976.
Although I have been talking about a technical rally for the past few days, I am also acutely aware that I see a bounce as a short term move and still view any rebounds as a chance to sell. I foresee Cable retesting $1.4810 in due course. So where are we looking for the bounce to reach? Interestingly, over the past couple of days, Cable has traded in a 100 pip range between $1.5100 and $1.5200, with yesterday’s high of $1.5193 being tested a few times intraday. This could suggest that on a near term basis the resistance around $1.5200 is fairly stubborn. Near term technical indicators are on the positive side of neutral but whilst the resistance is intact there is a ceiling in place preventing further recovery towards $1.5320. So we must await the breaking of this 100 pip range before we can call the next direction. Be mindful that UK CPI this morning at 09.30GMT will have an impact on Cable.
Price action has been rather choppy since the turn of the year but there is a slightly negative slant to trading which has seen Dollar/Yen posting a lower high at 119.96 below the 120.82 key reaction high. The intraday support around 118.00 which was tested on a couple of occasions yesterday was breached overnight and although there has been a positive reaction from 117.72 the correction appears to be on now. On the intraday hourly chart there is a downtrend that can be drawn from 5th Jan which encompasses all the intraday peaks and currently comes in around 119.35, whilst all the hourly moving averages are in decline. I have been talking about a possible correction recently due to the drifting momentum indicators on the daily chart (albeit I have been indecisive due to the choppy trading), however there is a clearer trend that is now forming. I still expect to be buying the correction at some stage though as I remain a medium term bull. A move above 120 would reinvigorate the buyers.
Despite a difficult run, the bulls are starting to really gain some traction now. Yesterday’s price action was entirely above the long term downtrend and if this happens again then we must seriously consider the fact that the bulls are a force to be reckoned with now. Early Asian trading has also seen the gold price push above the key resistance at $1238.20, taking it to a near 3 month high. Furthermore, I have said for a while that I wanted to see the RSI pushing into the 60s to add confirmation of strengthening momentum, whilst Stochastics and MACD are also responding well now. The price is in a bull flag breakout which implies a near term target of $1258.50. This would mean a direct challenge to the key medium term resistance at $1255.20. The intraday hourly chart shows good support held up a correction at $1218.20.
Who is confident enough to call a bottom in oil? Certainly I am not. Looking at the outlook on the technical perspective it is difficult to see how a rally could take hold. The momentum indicators remain deeply bearish (although the RSI is once more back to 21 with the recent consolidations tending to come in around 20).The problem is that having broken below $50 (which is also now a basis of resistance) the April 2009 low of $43.83 is now the next real support and there is little reason to suspect that oil will not get there. Furthermore, If that support is breached then the subsequent low does not come in until the levels posted around $33 which were seen during the nadir of the sell-off of 2008/2009. In the meantime, expect any intraday rallies to be sold into. The initial resistance comes in around $46.80/$47.20 but far more prominently between $48/$49, with the key near term resistance around $49.60.