Last updated: May 3rd, 2017 at 09:58 pm
There has been a creeping caution to sentiment that has moved back into the market overnight as a rather downbeat BoJ held fire on monetary policy pat. A rather pensive and reluctant close on Wall Street has been met with selling pressure in Asian trading. The Bank of Japan (as expected) did not move on its monetary policy but also painted a rather gloomy view of the Japanese economy. This has driven traders back into the yen and risk appetite across equities and forex alike seems to be in somewhat short supply today. The market is also cautious as the Federal Reserve begins its two day meeting today. Further concerns are being brought as the oil price has started to tail off its recovery. Suggestions out of Iran were that it would not take part in any oil production freeze as it looks to normalise its own levels having only recently come back from international sanctions. A target level of 4m barrels per day would suggest there is still some way to go in ramping up its production and this is hitting the oil price again today. The positive correlation between oil and equities/market sentiment continues and this could be an issue across markets if the oil price begins to slide again.
In forex markets we see the yen strength being the big outperformer, whilst the higher risk commodity currencies are again under pressure and a sustained reversal on sterling is also threatening. The euro is managing to find support and is a little bit more contained than other forex majors. The gold price has again continued its recent decline, with oil again over 1% lower.
As the FOMC sits down to meet there are still a clutch of US economic indicators to watch for this afternoon (don’t forget the data is all released an hour earlier in European time). The main focus will be on Retail Sales at 1230GMT which is expected to fall by -0.2% for the month-on-month core data. The Producer Prices Index is also at 1230GMT and is expected to rise by just +0.1% for the core data. There is also the Empire State manufacturing index at 1230GMT which is expected to stay sharply in negative territory at -10. Finally at 1400GMT there is a bit of housing data with the NAHB Housing Market Index which is expected to pick up slightly to 59.
Chart of the Day – Silver
The silver price is in a choppy phase and with gold starting to look a rather toppy, the question is whether this is a phase of silver building a reversal pattern. The momentum indicators are reasonably positive but the Stochastics are threatening to turn lower and having broken the 3 month uptrend on the RSI it is not as strong as it has previously been either. The Fibonacci retracements of the $13.71/$15.95 rally continue to act as important turning points for silver, with the support of the 38.2% Fib level increasingly becoming a pivot level. The impact of the bullish engulfing candle on the day of the ECB announcement has now been negated by yesterday’s bearish engulfing candle that has come from $15.82. This all continues the rather messy trading period for silver. There certainly seems to be a band of resistance $15.80/$15.95 in which silver consistently finds an offer with selling pressure as the rallies seem to flounder up at these levels. The building series of negative candles means I favour a retreat to test the 38.2% Fib level at $15.09 once more and likely test of the uptrend in due course.
The bulls continue to be tested as the euro puts pressure once more on the 50 pip pivot band $1.1050/$1.1100. Intraday dips below $1.1100 in the past couple of sessions have been repelled into the close but the pressure is mounting. Momentum indicators are also beginning to roll over with the Stochastics now threatening to cross lower. I still see this as the chart trying to settle in the wake of the huge volatility of last Thursday (ECB day) but an intraday move below $1.1050 or a close below $1.1100 would suggest continued retracement. The intraday hourly chart shows the consolidation is forming a series of lower highs with a near term downtrend that comes in around $1.1150 and hourly momentum that is becoming bearishly skewed. Key resistance remains at $1.1217.
The dollar bulls are fighting back in front of the Fed and this is helping to drag Cable back lower again. This comes as the resistance around $1.4410 has curbed the rally. Is this just a minor blip within the recovery or are the bears back in control? For now, the signals are inconclusive, but could be on the turn. Watch out for the support of the old downtrend giving way (once downtrends are broken, they then become a basis of support). Also watch the Stochastics which are threatening to cross lower. There is also a support at $1.4250 which is shown on the intraday hourly chart, a support which also needs to hold, otherwise the way will be open for a full retracement to the $1.4115 key reaction low following the ECB announcement. This is an important test of support for the Cable bulls then. A breach of $1.4115 would confirm the breakdown of the recovery.
Once more it seems as though there is a sizable offer for Dollar/Yen up at 114.00. Time and time again over the past couple of weeks this has been an area where the pair has failed and the selling pressure has kicked in, even if it has only been near term. The reaction overnight has been for yen strength to drag the pair lower again as the Bank of Japan held its fire on any further monetary easing. The consolidation over the past few weeks that has formed a rather tight trading band above 112.15 support and below 114.55 resistance therefore continues. Momentum indicators have a mixed outlook and with the 21 day moving average flattening there seems to be little drive for a breakout. This is also showing through on the hourly chart with the pivot at 113.15 still seemingly a key near term level to watch. Rallies towards 114.00 are being sold into with the 113.15 pivot acting as the line in the sand between positive and negative within the band. With the BoJ unable to be the catalyst for some direction, the market will be looking at the Fed instead.
Although I have previously started to believe that the gold rally was coming to an end only for the bulls to react strongly again, this time it does look as though some traction to the downside is finally showing through. A second strongly negative candle has not only confirmed the broken 7 week uptrend, it has also taken the price to close back below the 21 day moving average which has been flanking the bull move for several weeks. I spoke previously above the bearish divergences on the momentum indicators and that the RSI would begin to look concerning on a move back below 60 and this has now been seen with the RSI at its lowest for two months. The Stochastics are also in corrective mode too now and the MACD line are falling. The pivot around $1261 proved to be another turning point yesterday, whilst the breakdown of the support at $1237 has also been a key move to complete arguably a small top pattern that gives an implied downside move back towards the $1200 area. There is now near term resistance between $1237/$1245 for a selling opportunity.
The bull run is now under pressure as a strongly corrective candle completed yesterday. This has now broken the uptrend that has been in place for the past four weeks and the momentum indicators are threatening to roll over. My fears of the bearish divergences that had been forming on the intraday hourly chart seem to have weighed on the outlook as the market has turned lower from Friday’s rally high at $39.02 (interestingly which was also a bearish engulfing hourly candle). The initial higher low at $37.20 has been breached but also importantly the support of the rising 89 hour moving average has been lost. Hourly momentum has now taken on far more of a corrective and is now the most corrective it has been for over a month. There is now a big emphasis today on not only the direction of trading (there have not been two consecutive negative candles since 19th February), whilst the key reaction low at $36.10 is also important. This correction should be closely monitored as it could be a pullback to the neckline of the big base pattern at $34.80.
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