14/01/2015: Volatility and weak oil continues to dampen sentiment as ECJ judgement looms

Market Overview

Volatility remains high on global financial markets and this means that traders and investors are getting thrown around on a daily basis. The commodity story is a major cause for concern as the oil price continues to plummet and with metals such as copper also falling 5% on the day there are considerable questions over a lack of demand that are plaguing markets. Safe haven plays have done well in recent days and the classic safe haven currency, the yen has significantly strengthened. Volatility indices such as the VIX are back on an upward trajectory which is also not positive for equity markets, which have a negative correlation. Into today there will also be nerves over the European Court of Justice which gives a ruling over the legality of the ECB’s life support programme the European Stability Mechanism, which was put in place as a backstop after Mario Draghi pledged to do “whatever it takes” to save the Eurozone. Depending on the outcome, hopes of the implementation of QE could be dashed today.

Wall Street had a rather wild session, having been strongly higher and then strongly lower, markets closed only slightly weaker with the S&P 500 down by 0.3%. Asian markets have also struggled overnight as the World Bank cut its forecasts for global growth in 2015 from 3.4% to 3.0%. With the strengthening of the yen, the Nikkei has also come under pressure and was down 1.7%. European markets are responding to the overnight selling pressure and are sharply lower in early trading.

In forex trading, there has been a safe haven shift. The yen is the main beneficiary, with the commodity currencies (Aussie, Kiwi and Canadian Loonie) all under pressure. It is interesting also that both the euro and sterling continue to consolidate against the dollar.

The main news today is the ECJ announcement, but there is also US Retail Sales to consider at 13.30GMT. The consensus forecast is for a slight month on month gain in December of +0.2% (versus +0.7% in November, which did though contain Black Friday). Bank of England governor Mark Carney is also due to speak at 14.15GMT about the Financial Stability Report which may have an impact on sterling.

Chart of the Day – Silver

Silver is an interesting chart because it is lagging gold and is yet to breach its equivalent December high at $17.33 (which gold did when it moved above $1238.20). However there appears to be more of a base pattern in place if silver can complete the move. Silver broke a big 5 month downtrend in December and since then the price has been going through a base pattern formation process. The shorter moving averages have bottomed, whilst the momentum indicators have been steadily improving. The RSI for example yesterday closed at a 6 month high at 62.5. The price has turned lower from $17.19 since yesterday and the initial reaction overnight has been for the price to slide a touch. However the indicators suggest that intraday corrections are a chance to buy as it looks increasingly like there will be further pressure on $17.33 and the potential for a completion of the base pattern. The intraday hourly chart shows a strong band of near term breakout support around $16.60. Breaking the support at $16.16 would question the near term revival now.

Silver   14012015

EUR/USD

Despite the fact that global investor sentiment remains weak, the euro is still hanging on to the support formed last week at $1.1753 by a thread. The decline yesterday hit a low of $1.1752 before another bounce. However I imagine this will be just a consolidation before today which could well be the next big move. The European Court of Justice will give a ruling on the legality of the ECB’s European Stability Mechanism programme today and if it gives it the green light (or in the least supportive comments) then this opens the way for full blown QE and should drive the euro lower. Technically the euro is still looking dreadful as it consolidates under $1.1875 which was an old critical floor that was breached last week. A move above $1.1875 would imply a technical rally back to $1.2000, but I am expecting a downside break. A clean break of $1.1753 opens $1.1640.

EURUSD   14012015

GBP/USD

The consolidation on Cable has more in it for the bulls than it does for the euro. Whilst the euro is testing support within its band, Cable has just pushed above its $1.5200 resistance. Over the past two days there have now been three separate intraday attempts at breaking though $1.5200 with success at a fourth attempt. This now opens the next intraday resistance at $1.5320. The daily candles have had an uncertain look to them although there have been daily closes towards the highs. The RSI has moved above 30 which suggests the technical rally is taking shape. From the $1.5032 bottom there has now been at the peak on Monday a rebound of around 180 pips, whilst the rallies over the past few months have tended to be between 200/300 pips so there is still potential for further rebound if Cable now it has breached $1.5200. Initial support is now at $1.5074.

GBPUSD   14012015

USD/JPY

I spoke yesterday about the sequence of lower highs and also the breakdown of the support around 118.00. This sequence has continued and the additional downside move in Asian trading overnight shows that the flight into safe haven plays continues. These moves have left a latest lower reaction high at 118.84, whilst also quickly breaching the band of support 117.00/117.50. This now means that having gone from a minor near term correction to potentially something much more significant. All of a sudden the key reaction low at 115.56, which is the December low, has come into view. The daily momentum indicators continue to slide, with the RSI at a 3 month low and Stochastics also in decline. The MACD lines are still above neutral so there is no need for the bulls to panic quite yet, however this support at 115.56 is now very important on a medium term basis. There is now initial resistance intraday between 117.70/118.00.

USDJPY   14012015

Gold

With gold breaking above $1238.20 on an intraday basis the excitement levels have grown for the bulls. However this mood just needs to be reined in slightly as yesterday’s quite disappointing close for a negative daily candle at $1230.40 is just resulting in a pause for thought. How sustainable is this move? The Stochastics have already started to lose impetus, whilst the RSI has actually not managed to make the move decisively into the 60s. The conservative trader in me is also mindful that despite a sharp move into safe haven yen overnight, the move has not been replicated on gold. This could just be a consolidation, as gold has been on a strong run of late. The key near term test would be the support band now formed between $1216/$1222.40 as if that can hold on an intraday basis then the bulls will be on firmer ground. Furthermore, there is still a bull flag in place which implies a retest of the $1255.20 key October high.

Gold   14122014

WTI Oil

Even on a day where WTI managed to rebound over 4% from the $44.20 low, the outlook remained bearish, with an intraday bounce that was barely even able to register as a rally. The daily candle again failed to post a gain on the day. Interestingly also, on the hourly chart the rally simply went from the lower 2.0 standard deviation Bollinger Band only to stop and turn lower at the top band. With the strength of the downtrend, this would suggest it is simply another selling opportunity. You have to look on the hourly chart also to find resistance, with the first area coming in at the low posted a week ago at $46.83 and towards $47.20.  It was also interesting that yesterday’s mini-ally peak was at $46.70 and just under the previous floor. The hourly RSI has merely unwound from oversold with the rally falling over as hourly momentum has unwound. Whilst I am mindful that the potential for a sharp technical rally is growing, I find it difficult to justify catching this falling knife. With this in mind these intraday rallies must be used as a chance to sell.  The April 2009 low of $43.83 is now the next real support and if that is broken it opens the critical lows around $33.

WTI   14012015

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