With China celebrating New Year and oil slightly higher, it is a relatively benign start to the trading week for traders. Markets have a fairly settled look to them, with a reasonable amount of positivity to kick us off. The fact that it is the Lunar New Year means that many Asian markets will be closed, with China on public holiday all week. This means that volumes will be lighter in the coming days and the steer less certain from Asian in the mornings. Today’s lead from Japan and Australia has been mixed with Japanese equities benefitting from a weakening yen as the Nikkei 225 has rallied 1.1%. The legacy of Friday’s mixed Non-farm Payrolls report will continue to resonate and there is a positive open to European trading despite the sharp declines on Wall Street on Friday that saw the S&P 500 off 1.9%. Another factor helping the settled sentiment today is that the oil price is also fairly benign today. On a week that is not overly busy on an economic data front, could this become a feature of trading in the coming days during Chinese New Year?
Forex markets are showing a reasonable amount of risk sentiment, with sterling positive as well as yen weakness, whilst the commodity currencies are also performing well. Gold has started to give back some of its sharp gains from Friday and needs to be watched closely. Oil is just under a percent higher, whilst Treasury yields are looking reasonably settled.
There is nothing of any note on the economic calendar today.
Chart of the Day – EUR/JPY
The pair has been in a very well defined downtrend channel for the past 8 months and the rally from the bottom of the channel on the back of the BoJ easing has once more found resistance at the top of the channel again, which should act as another chance to sell. The negative candles have been mounting over the past week and the momentum indicators are now giving a series of sell signals. The Stochastics giving a confirmed sell signal on Friday whilst the RSI has rolled over again around the mid-60s suggesting that a high is in place now at 132.25. The 131.65 reaction peak on Thursday also gives us the prospect of a lower near term high and the bears are gathering pace and that rallies are increasingly being sold into now. The hourly RSI has unwound back to a level where the sellers have traditionally returned whilst there is also resistance from late Thursday/Friday around 131.00 holding back a recovery. The reaction low at 130 is under pressure and a breach would open the 128.75/129.10 support band.
Having made the breakout above the old key pivot band of $1.1050/$1.1100 last week, the next move is to consolidate the breakout. The euro moved to a far more positive outlook on the momentum indicators but is just drifting a touch now. However if there can be a new support that forms in or above the pivot band then the bulls will be more confident pushing forward again. The reaction low on Non-farm Payrolls Friday posted $1.1107 before a bounce and this level is coming under pressure again today. The indicators are just rolling over a touch but I am still confident that the outlook for the euro has now changed on a medium term basis. The hourly chart shows overbought momentum having unwound and the pair beginning to settle. There is price support now at $1.1070 which the bulls would ideally hold on to. I now see corrections as a chance to buy and I will be looking for buy signals. Resistance is near term at $1.1165 and $1.1243.
I believe that the outlook for the medium term changed last week on the strong upside break. Subsequently I also believe that this correction that was seen on the Non-farm Payrolls report on Friday is counter to a recovery and will be seen as a chance to buy. The improvement on the RSI on the move above 50 is important, however there still needs to be continued development of the recovery in the MACD lines too. The Stochastics could though be a near term pain for the bulls as they have moved into overbought territory and crossed lower, meaning they are close to a near term sell signal. The hourly chart interestingly shows Friday’s post-payrolls reaction low at $1.4450 which was almost bang on the support of the old breakout at $1.4445 before the buyers returned again. This is a key near term level now. There is now resistance initially at $1.4585 with $1.4670 being key. The recovery would have been lost on a move below support at $1.4350.
Is it possible that the outlook is going to turnaround again on the support around 116.50? The rebound today has added decent gains in the overnight Asian session to improve what had looked like a fairly concerning run lower on Dollar/Yen. The key near term barometer will however be the resistance band that starts to come in around 117.60 towards 118.00, within which is the 23.6% Fibonacci retracement of 123.67/115.96 at 117.78. A move above 118.25 would suggest that there is further legs to the recovery and then resistance areas such as 119 and maybe 120 will come back in. However for the near term the momentum is already quickly unwinding and getting back to levels where the bulls have struggled to maintain the push higher. I am still inclined to use rallies as a chance to sell but I am prepared to wait for the sell signal. Support is 116.80 and 116.42.
With 6 consecutive bull candles the gold price has added over $60 of gains as the run higher has accelerated. This move has seen a daily basis of initial consolidation prior to the sharp gains in the US session. The moves on Friday, even in the wake of the dollar gains on the payrolls report, also reflect this pattern. Overnight in the Asian session there has been a slight drift back as some of the overstretched momentum has weighed on the price. The question is whether this run will continue higher? The outlook is certainly beginning to look stretched and this is a concern with history telling us that these strong rallies on gold tend to come up against profit-taking before the move is unwound. The daily chart shows the RSI over 70 and the Bollinger Bands very wide with the price outside. The next resistance is up at $1182.50/$1190.60. Initial support is around $1161 with Friday’s low at $1145.
Friday’s payrolls report drove a fair amount of uncertainty for WTI but with the big 3 month downtrend still intact the outlook remains one of selling into strength. The lower high at $33.60 came underneath the key January reaction highs which have left resistance at $34.40/$34.80. The momentum indicators are still long term negative whilst also driving an expectation that rallies should be sold into. The big support is now forming at $29.25/$29.40 and this means that a choppy consolidation range is forming on a near term basis, with the hourly chart showing a mixed outlook on both momentum and moving averages. There is also the prospect that this could turn into a top pattern on a move below $29.25 now. The volatility on a day to day basis may mean that it is preferable to watch for a breakout of the key levels before we can really ascertain direction once more. For now though support is at $30.65 and resistance at $32.45.