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24/07/2015: Disappointing China PMI draining markets but drives dollar strength


Market Overview

Market sentiment has been hit in recent days by sharp falls in the prices of key commodities which continue to fall back to multi-year lows which  certainly does little to help the argument that inflation is ready to return. Data out of China over night will exacerbate this issue further still. The China HSBC flash PMI has come in at 48.2 which is clearly in contraction territory but also of more concern is a deterioration in a forward looking indicator that was expected to improve. The impact across markets in Asia has been sizeable. Although a deterioration in the PMI would usually result in a clamour and expectation for more easing measures from the PBOC, taken in the context of the rout in commodities recently, this was a bad number. Asian markets have fallen (Nikkei 225 closed off 07% taking the lead from Chinese data even though the Japanese flash PMI turned back into positive territory) whilst the European markets have also opened lower at the start of trading.

There has been slight impact on the forex markets from the China data, with hints of dollar strength continuing following on from the weekly jobless claims data yesterday which fell to a seasonally adjusted 255,000 which was the lowest since 1973. The Aussie dollar is the most under pressure, with its big weighting in commodities to China, the Aussie is off just under 1% in response. Gold and silver prices are lower, whilst oil is up (but it will be interesting to see how long that lasts).

Traders will be looking at the steady stream of Eurozone flash PMIs that come out early in the session, with the Eurozone wide data expected at 0900BST to come in line with last month at 52.5. The US flash PMI is at 1445BST and is expected to improve slightly to 53.6 (from 53.4 last month). The US New Home Sales will also be announced and despite the recent strong housing data, market expectations are that the number will be flat on last month’s 0.55m.

Chart of the Day – DAX Xetra

It would certainly seem that the DAX has rolled over and is now entering into correction mode. Today we should complete a confirmed cross over sell signal for the Stochastics, which have happened in each of the past three months and each signalled the beginning of a bear leg. I see this current move as playing out a correction now. I have drawn in some new Fibonacci levels that retrace the bull run from the December low at 9216 to the April high at 12,389. These Fib levels have been excellent at catching the key turning points on this chart and I now expect a move back to the 38.2% Fib at 11,176 to be seen. This is also very close to the pivot level of the old neckline support at 11,167. The hourly chart shows initial support comes from  a gap higher at 11,340 and a recent low at 11,415, however these levels could come under threat today. Near term resistance comes in between 11,530/11,615.

DAX   24072015

EUR/USD

With just under 50 pips on the rally yesterday the rebound off the key May support around $1.0820 continues. However I still see this as ultimately being little more than another chance to sell. I remain bearish medium term on the euro whilst the pair trades below the $1.1050 pivot level, whilst the euro is also still trading below all its moving averages. The momentum indicators have picked up on the daily chart but I see them as just unwinding from a stretched position. For this to change, the RSI needs to push consistently above 50 and the Stochastics need to break above the peaks of early July. The hourly chart seems to be a little more mixed in its outlook, but I spoke yesterday about the resistance band between $1.1000/$1.1050 capping the upside and this is the case so far. The minor support has built around the near term break above $1.0965 but there are slight negative divergences on the hourly RSI and MAC, whilst the hourly Stochastics have also fallen away. Watch the support around $1.0965 as if this begins to fail consistently then the bears could begin to grow in confidence again for a retest of the $1.0870 support.

EURUSD   24072015

GBP/USD

What a turnaround on Cable! From a position of looking to break to the upside yesterday, the UK retail sales disappointment completely turned the near term outlook on its head and driven lower by the weekly jobless claims, a bearish engulfing candlestick pattern (arguably a bearish key one day reversal  – but the fact that it did not come in an uptrend reduces the negative implications of this slightly) has been formed. This has bolstered the resistance at $15670 and should put the sellers in control no near term. The RSI has turned lower whilst the Stochastics which had been looking to break higher have also stuttered. If today’s candle is also negative then the pressure will certainly be mounting. The hourly chart shows the price now settling down below the old range which now means that the old range supports around $1.5530/$1.5560 now become near term resistance. There is no absolute breakdown in the hourly momentum indicators yet which suggests there is a certain amount of consolidation underway. However the 61.8% fib level at $1.5470 and support at $1.5450 could come under pressure today and if they do it would suggest the bears are beginning to mount a charge once more.

GBPUSD   24072015

USD/JPY

In the past few days I have been trying to ascertain the implications of Dollar/Yen backing away from the resistance at 124.43 and I am still none the wiser. With a pair of very neutral, indecisive (almost doji) candles the outlook is difficult to determine. The bearish engulfing candle of Tuesday still has a legacy but it is diminishing. The Stochastics rolled over some days ago but as yet they have not given a confirmed sell signal whilst the RSI has settled in the mid-50s. My takeaway from this would be that the outlook is on a knife edge and could go either way quite easily. The near term support band at 123.54/123.70 (just above the 123.20 38.2% Fib level) is holding with hourly momentum increasingly neutral. The break levels for me would be a decisive breach of 123.20 on the downside or a daily close above 124.43 old resistance. Much in between will be noise.

USDJPY   24072015

Gold

Another case of an intraday sell into strength has hit the gold price. I say “strength” but in the context of the medium to longer term bearish outlook on gold, a $10 rally intraday is doing little to deter the bears. If anything is will ma encourage the sellers. The outlook remains incredibly poor, with the price once more falling below yesterday’s low in the early Asian trading session, taking it to levels not seen since March 2010. It is difficult to have any other strategy than using intraday rebounds as a chance to sell. The intraday hourly chart shows the sequence of lower highs and lower lows in the past few days, with $1105.60 adding to the previous $1109.50 and $1118.70 as key near term levels. Look to use the hourly momentum indicators unwinding to find opportunities to sell. I feel there is further downside in this bear leg with the 2010 low at $1043 still to be tested.

Gold   24072015

WTI Oil

The lower highs and lower lows keep on coming for WTI as the price continues to fall away, now back decisively below $50 again. The next implied target remains $47.30 whilst the next support is at $47.00, both of which could easily be seen in the coming days. The momentum indicators certainly suggest that downside pressure continues, with bearish configuration and further selling potential. Rallies continue to be seen as a chance to sell, even on an intraday basis. The hourly chart shows the breakdown of the support at $49.80 whilst yesterday’s peak at $49.63 adds to the resistance. The hourly RSI suggests that intraday moves back towards 50/60 now tend to be the limit before the bears return.  The big near term resistance comes in between $50.60/$51.25.

WTI   24072015


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