The first week of the month is always packed with key tier one economic data which gives traders a chance to take a view. The dollar has been under significant pressure in recent weeks dropping to nine month lows, but could this be about to turn around? The dollar tends to be well correlated with moves on US Treasury yields and it is interesting that Treasury yields once more seemingly turned a corner but the dollar is yet to respond. The “bear steepening” of the yield curve (as longer dated yields rise faster than shorter duration) should help to give the dollar support. But with rival major currencies all having rallied harder on far less dovish central bank rhetoric (from the ECB, BoE and BoC), the dollar has yet to react higher. However there is a suggestion that a near term reaction could be seen as key pairs show signs of a turning point. For now any improvement is a start, however all rallies have to begin somewhere. This also comes as gold is breaking through another key pivot support (around $1240) and Dollar/Yen threatening higher again. China’s Caixin Manufacturing PMI beat expectations and came in above 50 (i.e. back in expansion territory) which should help to improve risk appetite in front f the raft of manufacturing PMIs today.
Wall Street closed unconvincingly higher on Friday (S&P 500 +0.2% at 2423) whilst Asian markets closed mixed to slightly higher early today. European indices are flat to mildly positive in early moves. In forex, the dollar is making marginal ground across the majors, with the Aussie and Kiwi mild underperformers despite the positive China data. With a stronger dollar comes gold weakness and the precious metal is breaking below $1240 pivot support now. Oil remains bid after the US rig count dropped for the first time in several weeks on Friday.
The manufacturing PMIs are the focus of the first trading day of the month. The final Eurozone manufacturing PMI is at 0900BST and is expected to be confirmed at 57.3 (which was the flash reading). The UK Manufacturing PMI is at 0930BST and is expected to be broadly the same as last month with 56.5 (56.7 last) which would continue a run of the last two months which have been around three year highs. The US ISM Manufacturing PMI is at 1500BST and is expected to be slightly better at 55.1 (from 54.9 last week). This ISM number will be watched as the recent trend in the data has been falling away.
Chart of the Day – FTSE 100
Equities have been corrective now for the past few weeks but the FTSE 100 has now completed a well-defined head and shoulders top pattern on a move below 7378. The top pattern implies 220 ticks of further correction towards 7160. Thursday’s closing breakdown came with an interesting intraday rally that failed around the old 7447 pivot and adds to the overhead resistance now in place. It was also very interesting to see that Friday’s confirming second day close below the neckline also contained a pullback to the resistance of the neckline at 7378 which failed and once more closed lower on the day. Rallies are clearly now being sold into. This comes with increasingly corrective momentum with the RSI below 40 and at a 9 week low, the MACD lines accelerating below neutral and the Stochastics bearishly configured. The hourly chart shows a bulk of overhead supply between 7377/7452 for the next selling opportunity if there is an early rally this week. Friday’s low at 7318 is initially supportive whilst 7255 is an old pivot and will also be eyed.
The advance in the euro has just begun to stall slightly in the past couple of sessions. Friday’s mildly negative candle cut just around 15 pips out of the price as the rally has just begun to lose upward momentum. The daily RSI around 70 tends to be considered historically stretched for the euro and having closed at 71 on Thursday it is perhaps unsurprising that a degree of profit-taking could set in. It was also the end of the month and quarter on Friday which could both have played a part too. However, corrections will still be seen as a chance to buy. The hourly chart reflects this stalling, with the mild negative divergence on momentum. A dip below $1.1390 today would complete a small top pattern and imply around 55 pips of correction. With daily momentum still strongly configured, the medium term breakout support around $1.1300 would be an ideal entry. £1.1445 is initial resistance with $1.1500 still well on the cards.
After several strong bull candles the run higher has just begun to lose some impetus. Friday’s candle was ultimately positive but for much of the session threatened a far more corrective candle. The bulls will be happy that they prevailed, but initial intraday drop could prove to be the early sign of a mior corrective move. The early dip back today adds to that concern. The run of higher daily lows has now completed seven sessions and so the support at $1.2945 takes on increased importance today. The fact that Friday’s move peaked at $1.3030 (just under the $1.3047 key May high) is also interesting as the market has so far failed to break through resistance. The momentum concerns for the near term run higher are added to by the negative divergences on hourly MACD and RSI lines. A breach of $1.2945 would complete a small top pattern and imply around 80 pips of further correction. Calling top patterns before they complete can be a risky strategy do the support at $1.2945 needs to be broken.
The intraday moves may have more magnitude but the consolidation of the past few sessions has similar hallmarks to the run of four mild drift candles a couple of weeks ago. The bulls have been in control for a while now and there is still an expectation that the market will continue to be bid for another upside break. The early move today suggests that the buyers are still willing to control the moves, whilst continued trading above the band of resistance 111.55/112.20 will add confidence for moves towards 113.00 and the key May high at 114.32. Momentum remains strong with the RSI pushing above 60 again and MACD lines now rising above neutral. The hourly chart shows the importance of a near term breakout above 111.70 which has become supportive. There is a mildly positive bullish bias to the market trading above all the rising hourly moving averages. This suggests that dips remain a chance to buy and pressure on the recent resistance at 112.92 should continue.
The downside pressure of the past few sessions is beginning to tell and it looks like gold bulls should prepare for a downside break of the pivot support at $1240. The run of lower highs, consistent pressure on the support and negatively biased momentum have been pointing to a downside break, however the early intraday breach of $1240 needs to be confirmed on a closing basis. A close below $1240 would imply a $21 downside target (of the range $1240/$1261) and bring the key May low of $1214 back into play. There is another old pivot around $1216 which is the next target area. Unless the bulls can salvage today’s session, rallies will increasingly be seen as a chance to sell. This increases the importance of the resistance at $1248.20 (Friday’s high) with a near term sell zone today between $1240/$1244. The hourly RSI is a touch stretched and unwinding moves to towards 40/50 have been sold into.
WTI continues to rally as a seventh consecutive close higher has been posted. The close above $45.05/$45.20 resistance is the latest positive development in the recovery which continues to improve on momentum indicators. The RSI is at a four week high and now pushing above 50, the move continues to flourish. The MACD lines continue to recover having posted and bull cross, as do the Stochastics. The next key resistance is the key pivot band $46.70/$47.00. The last seven sessions have also posted successive higher lows, therefore Friday’s low at $44.90 becomes supportive. The hourly chart shows a five day uptrend formation with key support near term at $44.45. Corrections are now a chance to buy.
Dow Jones Industrial Average
Thursday’s bearish engulfing candle is now the over-riding near term indicator and pushes a corrective outlook on the chart. Although the bulls are hanging on to the support band 21,070/21,225 the momentum indicators are increasingly corrective with the Stochastics and MACD lines tracking lower, whilst the RSI is also decisively below 60 for the first time in several weeks. Friday’s recovery candle never really got going and was more of a damp squib of a recovery and a doji candle denoting uncertainty sums up the recent mood for the bulls fairly well. Also whilst the resistance of the bearish engulfing candle at 21,488 remains intact, the corrective outlook will continue. Thursday’s low at 21,197 is supportive but the hourly chart is taking on a bearish bias that suggest that rallies are increasingly being sold into. It is important to note that for now this is a near term correction, but equally, the bulls are now not in the driving seat. Friday’s intraday low at 21,325 is the initial support today and with a bearish engulfing candle on the hourly chart the bulls will have to work hard to prevent the corrective outlook from taking hold. Initial resistance at 21,426.