Last updated: May 3rd, 2017 at 09:58 pm
After the tumultuous opening trading day of 2016, will traders get a chance to draw breath? Well, the Asian markets have been a touch more settled at least, even if the intraday volatility on the China Shanghai index has remained elevated. Market sentiment has been rocked by concerns over Chinese growth (just like 2015 all over again), and concerns over a deterioration in the US manufacturing sector. So what’s new then? Perhaps the added impact of tensions in the Middle East escalating between Saudi Arabia and Iran? It seems as though the moves were somewhat excessive yesterday and could be open for retracement as the week progresses. Already, there is a European equities rebound, whilst forex majors are off the worst levels of yesterday. Watch the performance of the safe haven plays which are also unwinding the gains of yesterday, with US Treasuries and the yen unwinding. Can the bulls pick themselves up and retrace the early bearish moves of yesterday? The degree of the retracements could be the driving force behind direction in the early weeks of 2016.
Forex majors have a far more settled look to them today after the sharp intraday swings of yesterday. With commodities more supported it is interesting to see currencies such as the Aussie and Canadian Loonie performing better. Gold is continuing its gains from yesterday, whilst oil is also settled.
There are only a few economic announcements today with UK Construction PMI at 0930GMT (56.0 exp) although this number is likely to only have a limited impact on sterling. The Eurozone flash CPI will be an impact on the euro at 1000GMT, with +0.3% year on year expected, which would be a continued improvement on the revised +0.2% last month. Also look at the core data improving to an expected +1.0%.
Huge selling pressure came through on Euro/Yen yesterday as the sharply negative move breached the key November low at 129.60 to continue the downtrend channel lower. This is clearly a worrying time for the euro traders currently, but the last few months of trading the pair shows that this is an increasingly extreme move. Could this be close to a reversal again? The bottom of the trend channel comes in at around 128.00 today, whilst every time the RSI has hit 30 or just below in the past 6 months it has induced some support. There has been an initial rebound off 128.64 yesterday which will act as support today. The intraday hourly chart shows there is much to unwind from the recent sell-off, however, momentum is clearly negative now and it will be interesting to see how the bulls react now as there is little meaningful support until the April low at 126.05. The main near term resistance is 130.40/131.00.
An incredible first trading day of the year has put the bulls on the back foot straight away. The initial strong reaction higher was completely turned around to leave a bearish candle and a continuation of the recent trend lower. However it has been the breaching of the bottom of the $1.0810 band that is the big development. Although previous moves in December had tested the bottom, a 30 pip intraday breach yesterday is a serious test. The bulls clawed back to close the day above the support but we will see today the significance of yesterday’s move as today’s session develops. If there is further pressure below $1.0810 today then the legacy will be that the bulls can no longer count on this support and the confirmed breakdown would be forthcoming. Momentum indicators are corrective with RSI at a 5 week low. The intraday hourly chart is interesting though in that the momentum is fairly neutral still, although it has a slight bearish bias. This could suggest there could be further pressure on the support today. I am neutral but with a mind for turning bearish if confirmation of a breakdown comes today. Initial resistance is around $1.0880 and then more importantly around $1.0950. A closing breach of $1.0810 re-opens the lows at $1.0540.
Selling into strength remains the strategy on Cable and once more yesterday’s trading reflects this. With selling pressure returning in the near term resistance band $1.4800/$1.4850 the bears are still in control. The candlestick formation was reasonably negative and there is little sign on the negatively configured momentum indicators that there is any sustainable rally due. The hourly chart also reflects this and suggests that using near term rebounds as a chance to sell still. The hourly RSI continues to fail around the 55/65 area, whilst the hourly MACD and Stochastics also suggest the bulls are unable to gain any traction. A retest of yesterday’s low at $1.4660 is likely whilst the April low at $1.4563 is still in sight.
The sharply bearish candle from yesterday lost some of the downside impetus into the close yesterday and once more interestingly enough, Dollar/Yen closed around a key Fibonacci retracement level (the 76.4% Fib at 119.37). With momentum indicators negative, the strategy of selling into strength remains viable and any retracing rebound today should be seen as such. I would continue to look at the Fibonacci retracements for guidance with the overhead resistance now with the 61.8% Fib level. This means that there is a 20 pip band of initial resistance in at 120.00/120.20. The hourly chart shows that the rebound off yesterday’s low at 118.68 has merely unwound oversold momentum and is giving another chance to sell. The trend is your friend, and the trend on Dollar/Yen continues to decline.
For the past few sessions I have been talking about the prospect of gold forming a base pattern and this prospect has certainly increased with a strong bullish candle yesterday. However once again I am intrigued by the fact that a rally above the old floor at $1077 once again failed to achieve a daily close above. This is where the band of overhead supply continued to hit the gold rallies. The early moves in the Asian session today have seen a push into the resistance again, so the bulls are having another go. The momentum indicators have taken on a far more improved configuration and there is a sense that something could be building. However there needs to be a 2 day close above $1077 (something now seen since mid-November), whilst a close above $1088.70 would confirm a base pattern completion. For now though this is an improving chart at best and the bulls need to take that next step. The intraday chart shows initial support around $1070 before $1061.50 and $1058 becomes more significant.
A significantly volatile trading session has left us really none the wiser over the prospect of this base pattern. A couple of intraday attempts at the resistance floundered around $38.40 only for the bears to return once more for a sharp sell-off. The latest bearish candle leaves a legacy of downside pressure back on the end of year low at $36.20 again, however this is still an uncertain chart. The momentum indicators are indecisive (as they would be with the continued topsy turvy moves of the recent sessions). Until there is a closing breach of either the support at $36.20 or resistance at $38.40, and a subsequent consecutive candle, it is difficult to take a view. The momentum indicators of the hourly chart reflect the choppy trading. A breach of $35.65 would confirm the bearish control has resumed. Until then the potential for a base pattern remains.
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