29/05/2014: Equity markets still cautious as US dollar and Treasuries break key levels

Market Overview

Following a day light on economic data, equity markets remain very cautious as Wall Street indices closed lower across the board. The apprehension filtering through to Asian markets which were mixed overnight. The rally in the Nikkei has been stunted as the yen has started to strengthen once more. European markets are equally uncertain how to trade with volumes expected to be light with Ascension Day in Germany, France and Switzerland. Yesterday’s sharp decline in US Treasury yields which took the 10 year to an 11 month low goes some way to explaining why equity markets could retain a cautious outlook today.

After the Dollar Index broke to a new three month high yesterday, forex trading in early European trading is showing the dollar coming under a little pressure against the major pairs. The standout performer so far is the Aussie dollar which is over half a percent and over 50 pips higher.

This comes ahead of the key US data that is due today. The second reading of US GDP for Q1 is announced at 13:30BST with an expectation that there will be a substantial downward revision to the +0.1% in the Advance reading, down to contraction territory with -0.5%. There is also the weekly jobless claims which are expected to improve slightly to317k (from 326k), while the pending home sales are released at 15:00BST and are forecast to show a 1.0% rise.

Chart of the Day – Silver

I have not looked at Silver for a while as trading in the precious metals had been so muted recent week. However with the breakdown of gold it is interesting to see that this has not been replicated on silver, yet. The big support on silver comes in at $18.80. This is now the 7th time since November that the band of support $18.80/$19.00 has been tested. However, this time, there is plenty of downside potential on the momentum indicators which are all in negative configuration. Moving averages are all falling in bearish sequence and the outlook does not look encouraging for silver bulls. A breakdown of $18.80 would open the absolutely critical June 2013 low at $18.19. The falling 55 day moving average (at $19.66) has capped the recoveries in the past two weeks, however for there to be a reasonable suggestion of a sustained recovery there would need to be a move above $20.00.

Silver   29052014

EUR/USD

Another breakdown yesterday continues the series of lower lows as the Euro sells off. The next test comes with the $1.3561 low. Daily momentum studies remain in bearish configuration and imply that selling into strength is the strategy. Asian trading has seen some support return for the Euro, however this should once more be seen as a chance to sell. The intraday chart shows the hourly momentum indicators unwinding to renew downside potential and resistance between $1.3610 and $1.3640.It would take a move above $1.3668 for the bearish outlook to even be questioned at the moment. Expect further downside towards a test of the key February low at $1.3475 in due course.

EURUSD   29052014

GBP/USD

The big uptrend that Cable has been finding support at since November has been broken following a sharp sell-off for Sterling yesterday. This now brings into question the bullish outlook on Cable. I would prefer confirmation of this move and I see the 89 day moving average which has also been a basis of support though this time and this is still supportive at $1.6685. However the momentum indicators are reflecting the near term downside pressure Cable is under. Breaking the $1.6729 low has now seen Cable post lower lows and lower highs in the past three weeks and having broken the previous 7 month trend this could be the start of a new trend. The reaction low at $1.6680 is now under pressure with the $1.6552 key April low subsequently underneath. Overnight trading has shown some minor support but this could just be another chance to sell.  The upside resistance comes in at $1.6760 and $1.6780.

GBPUSD   29052014

USD/JPY

The dollar rally against the yen seems to be running out of steam as the pivot level around 102 once more appears to be doing a job as resistance with Dollar/Yen falling over once more. With the daily momentum indicators falling over and the falling 89 day moving average is the basis of resistance. There could now be another lower high in place at 102.14. I spoke yesterday about the importance of the 101.70 and subsequently 101.56 lows on the intraday hourly chart. The first level has now been taken out and over the past 36 hours the sequence of lower highs suggests pressure is mounting on 101.56. Hourly momentum is negative and downside pressure is growing The next supports to be tested would be 101.45 and 101.30. The pivot level around 102 remains the basis of resistance with a move above 102.14 hinting at a change of outlook.

USDJPY   29052014

Gold

The downside break on gold has been confirmed by another close below the support at $1268.24. If we were to take the converging trendlines as a symmetrical triangle then we could have a target derived from the breakdown at $1240. The outlook is becoming increasingly worrying for the gold bulls now as momentum indicators take on a negative configuration, furthermore the moving averages which had been neutral are now all falling away again. The intraday hourly chart shows little appetite to support gold yet as a near term drift higher found resistance just under the $1268.24 old support turned new resistance. The next real support does not come in until $1237.94.

Gold   29052014

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