A second day of a decent sized correction is taking the steam out of the push into new high ground on Wall Street, as the S&P 500 fell almost three quarters of a percent yesterday. With US Retail Sales and Weekly Jobless Claims both disappointing, investor fears over the potential for some form of military intervention by the US in Iraq has seen the oil price push strongly higher in a move that will not help prospective global growth which the World Bank had already cut forecasts for this week. Asian markets have been fairly positive though, with the Nikkei 225 stronger after the yen weakened overnight on the hints of future easing by the Bank of Japan’s Kuroda and news that Prime Minister Abe would be announcing corporate tax cuts today. European equity markets are trading slightly lower though, going with Wall Street’s declines.
The big news in forex trading has been that Mark Carney has signalled that the Bank of England could be hiking interest rates sooner than currently expected, which may mean the first move could come as early as the end of this year. This has subsequently meant a sharp appreciation of Sterling. As the yen also strengthened yesterday, the Dollar Index pulled back to 80.6 yesterday (although it is finding some support today).
Traders will be watching out for the preliminary reading of the University of Michigan Sentiment at 14:55BST, which is expected to improve slightly to 83.0 (from 81.9 last month).
Chart of the Day – DAX Xetra
With a two day correction the DAX is now approaching the support of a 2 month uptrend which come in around 9920. Furthermore there is the support of the key reaction low at 9867 and the rising 21 day moving average which supported a key reaction low in May. The concern is that the momentum indicators are beginning to deteriorate. The RSI has broken its equivalent 2 month uptrend whilst there has been a crossover sell signal on the MACD lines and the Stochastics (though not confirmed yet). “The trend is your friend” until it breaks, and the trend is still intact, but the momentum indicators suggest it could be coming under pressure. The intraday hourly chart shows deteriorating moving averages and momentum and suggests that upside impetus may have been lost near term. Downside pressure is growing and the 9867 support could be tested, below which opens 9810. A move above near term resistance at 9969 would help to allay the fears, with the all-time high at 10033.
A pick up in volatility has resulted in some support returning for the Euro and the first green candlestick for 5 days. However this is likely to prove to be just a near term reaction, with daily momentum indicators remaining in negative configuration. The intraday hourly chart shows the rate close to the overhead supply of the od lows around $1.3585. It would appear then that the current rally is likely to be sold as the oversold momentum unwinds. With a band of resistance at $1.3585/$1.3620 in place, expect a retest of the $1.3510 low and subsequently $1.3475.
Cable had an enormous day yesterday. The move through the intraday resistance at $1.6844 resulted in a burst of buying pressure which has seen scant regard paid to the reaction high at $1.6920 and the way opened for a test of early May’s multi-year high at $1.6996. The move has come amid a change of expectations on UK interest rates following a speech by Mark Carney. In the speech the governor of the Bank of England noted that views on a potential UK interest rate hike were becoming balanced and that a rates rise could come sooner than previously thought. This significantly changes the outlook on the chart. Cable is bullish once more and with momentum indicators turning positive but also with upside potential, expect further pressure on the $1.6996 high(above which is a peak at $1.7042 from July 2009 before resistance from October 2008). There has been further buying today and although buying into a minor correction would be good, there may not be the opportunity. The support comes in at $1.6920.
With a second day of significant weakness for the dollar the outlook on Dollar/Yen has deteriorated significantly. Trading sharply below the pivot around 102 suggests the bears are regaining control having seen dollar/Yen trade down at 101.57 yesterday. Although a sharp recovery has been seen in early trading today (following the decision of the Bank of Japan to keep monetary policy on hold), the rate is now back to the 102.00 pivot level. This will now be a test for the bears to see if they can maintain control they recently got back. The falling 55 hour moving average has been the basis of resistance throughout the past 4 days and is at 101.99 currently. Failure around the resistance band now in place at 102.00/102.20 would confirm a definite shift of outlook. There is a downtrend that comes in at 102.40 and only a move above there would abort the strategy of selling into rallies now. Expect a retest of the 101.41 low in due course.
As has been the case in the past few days, after some consolidation the gold price starts to push higher again. The move has undoubtedly been helped by the concerns that investors have over an escalation of tensions in Iraq with possible US intervention, which have driven a flight towards safer havens such as gold. Technically though the move has nicely unwound the rate into the resistance band between $1268/$1277. The $1277 area marks the support of several key lows during April and May which should now contain overhead supply and a key resistance area. The is also around where the 144 day moving average is (currently $1277.43) which historically been an excellent basis of support and resistance. This now means that the near to medium term outlook for gold is entering a key crossroads because the rally is quite strong and momentum is currently improving (not to mention the Iraq story providing support). However a failure around $1277 with a subsequent sell signal could signal the start of a new bear leg.