Last updated: May 3rd, 2017 at 09:58 pm
Traders continue to fret over a falling oil price as sentiment moved progressively worse on Friday, but could an improvement in Chinese data be set to led some support? Despite the weakness in Asian indices overnight as they played catch up on a European/US sell-off, the market reaction will be interesting today. China has previously been a big driver of markets and with both the Industrial Production and Retail Sales for November both beating expectations over the weekend, this could be cause for some support. The European equity markets are fairly positive initially at least. Perhaps the stability will also begin to wave through the markets as traders consider positioning for the Federal Open Market Committee on Wednesday.
The US dollar has taken a sharp reversal in the past week or so, with the move coming as the US 10 year Treasury yield has dropped to a multi-week low, which reflects the markets concerns over the declining prices of commodities and the threat that of a lack of demand will have on longer term growth prospects. This is something that the FOMC will be weighing up this week when deriving its monetary policy decision. However there has been an early recovery on the dollar, but it will be interesting to see if it gives another chance to sell.
There is nothing of any major note on the economic calendar today, however, watch out for Mario Draghi speaking at 1100GMT and he could generate some volatility if he talks about the ECB’s monetary policy decision.
The uptrend channel that I spoke about last week has now been broken and the ensuing downside pressure now seems to be in the process of forming a small but well defined head and shoulders top pattern. The key support which is also a three week low now comes in around $0.7170. The concern is that the technical indicators which had been previously supportive are now deteriorating. I spoke previously about the RSI which had been holding above 50, is now breaking down below this, whilst the Stochastics are now in consistent bearish decline. A breach of the neckline support would also mean that the Aussie is bearishly trading below all its moving averages too. Whilst there has been an intraday breach this morning, it would still need a completed move (ideally on a closing basis) below the neckline at $0.7170 which would imply a 215 pip correction back towards at least a test of the key support of the November low at $0.7010. The hourly chart shows the initial resistance that the bulls need to breach to improve the outlook is at $0.7265 but a move above $0.7335 would abort the topping phase.
The euro appears to be settling down now after resistance was formed just under the bottom of the old pivot band at $1.1050. The consolidation is setting in as the market looks towards the next key catalyst which is Wednesday’s FOMC meeting. With that in mind the technical indicators are beginning to flatten with the RSI around 60, and also the Stochastics beginning to lose upside impetus. I said last week that there could now be a trading range forming above the $1.0810 support and under the pivot band $1.1050/$1.1100. This may now have tightened to $1.0950 as the support, whilst there is a further level to watch at $1.0900. Whilst the technicals retain a slight bullish bias with the recent gains, I believe that the price could now be settling in for the next few days.
The rally on Cable is once again reaching the resistance of the four month downtrend. On numerous occasions over the course of the downtrend, the rallies have been used as a chance to sell. Is this time any different? I do not believe that it is. The trend currently comes in around $1.5250. The momentum indicators are still in near term recovery mode so it would be best to wait for a sell signal before selling, however the RSI is struggling to make too much headway. I think that the Stochastics would be the indicator to watch. Also as is always the risk with these situations, the resistance of a trendline can be fairly arbitrary. The hourly chart shows support has formed at $1.5110 with minor pivot level support at $1.5050. As with the euro, Cable could also be set to become more settled in front of the FOMC on Wednesday.
The selling pressure on the dollar continues as another very strongly bearish candle completed on Friday with a large bearish engulfing pattern. This certainly reflects the sizeable change in outlook over the past few days which has flipped sentiment on a medium term basis. Momentum indicators look far more corrective now with RSI, MACD and Stochastics all deteriorating. The underside of the old trading range at 122.20 has strengthened as resistance with Friday’s sell-off and intraday rallies are now being sold into. Once more there is a bounce early today and it will be interesting to see if the move can rebound back above the resistance band 121.25/121.50. With the sellers seemingly now back in control there is a potential to test the next support around 120.00. Friday’s low at 120.57 is the initial low.
There may have been a $23 range over the past week, but gold has seemingly formed a consolidation with neither buyers nor sellers willing to take a view ahead of the Fed. This can be reflected in the very small heads on the candles (tight range between price open and close). Momentum indicators are increasingly benign and it seems as though the market is now willing to take direction from the FOMC meeting. The reaction to Friday’s low at $1062.00 was clearly encouraging in that the selling pressure has been averted for now but there is still a lack of conviction in the trading. The resistance come in at $1085.20, however anything around the old resistance of the medium term floor at $1077 is a struggle for the bulls now.
Another day another sell-off on oil as the price of WTI continues to plunge towards the direction of the 2008/2009 lows of $32.40/$33.50. There is basically nothing positive to be said currently that will encourage the building of support and that could finally result in posting a key low. Rallies, even on an intraday basis remain a chance to sell as all technical indicators be it on the daily or hourly chart continue to point south. The hourly chart shows that a band of resistance has formed now between $36.65/$37.50 which will be looked upon as a sell-zone if by some miracle there is a rebound. The bears could remain in complete control until a breach of the reaction high at $39.00. Perhaps look towards using the hourly RSI unwind towards 50 as a chance to sell. The only positive that I can see is that pretty much everyone is bearish now and this will be of interest to the contrarians.
At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.