With the Treasury yield curve ever flattening, the dollar is back under pressure this morning despite signs of progress on tax reform in the US Congress. The House of Representatives have passed tax reform, however it has been notable that the market has barely reacted. This was never the difficult part, with the Republicans holding a decent majority. The issue has always been how the Senate Republicans can come to an agreement. There are many hurdles still left to negotiate, not least of all because of tacking on the politically toxic repeal of the Obamacare mandate which is expected to save around $340bn over 10 years. Treasury yields have barely reacted to this, whilst the corrective pressure seen on the dollar earlier in the week is creeping back in again. This is though coming with once more with a slight reduction in risk appetite. This is shown in the strength of the euro and the yen, whilst gold is also higher today. The sharp rebound on Wall Street last night has helped to allay some of the corrective fears on equities, however much of this move was driven through positive earnings. Earnings season is almost at an end and this means that equity traders may begin to cast an eye back on the flattening yield curve again. The 2s/10s spread falling at 64 basis points and ever further ten year lows shows the market remains sceptical of tax reform.
Wall Street closed with strong gains as the S&P 500 jumped 0.8% to 2586, with Asian markets responding positively (Nikkei +0.2%). European markets are mixed in early moves, with the FTSE 100 underperforming as sterling has rallied strongly. In forex we see the G4 currencies outperforming the dollar, whilst the commodity majors are struggling more, with the Aussie and Kiwi under pressure. In commodities, gold is benefiting from the slip in the dollar, whilst oil is into its third day of consolidation.
The week ends on a fairly quiet note today, however ECB President Draghi speaking at 0830GMT will be something to keep an eye on early in the European session. The Eurozone current account for September is at 0900GMT and is expected to see the surplus drop slightly to €30.2bn (from €33.3bn). Canadian CPI for October is at 1330GMT and is expected to see the headline CPI drop to +1.4% (from +1.6%). US Building Permits are at 1330GMT and are expected to improve slightly to +1.25m (from +1.23m) whilst Housing Starts are expected to improve to 1.19m (from 1.13m).
Chart of the Day – DAX Xetra
The outlook for the DAX is suddenly far more uncertain. It has been a hectic period for the market, with a sharp correction that lost over 650 ticks in just seven sessions. However Wednesday’s bull hammer resulted in a jump back higher again. Despite this move the rebound has not yet been convincing and there are a few question marks over its sustainability. Yesterday’s candle was positive but failed to really push on. There is a gap open at 12,976 the treatment of which will be an interesting gauge of the potential for the recovery. The hourly chart is also unconvincing in the rebound, with the momentum indicators (hourly RSI and MACD lines) just unwinding from an oversold position, and potentially just helping to renew downside potential. The early move higher gives hope for some stability, but there has also not been any breach of a lower high yet, with 13,139 therefore to be watched, and that is before the near term pivot around 13,197. The 23.6% Fibonacci retracement of the 11,868/13,525 rally is a basis of resistance now at 13,134 with the market rebounding around the 38.2% Fib level at 12,892. A failure under the 23.6% Fib level would question the validity of the rebound.
The recovery on the euro has been questioned in the past couple of sessions, with a reversal from $1.1860 and two negative closes. However the momentum indicators have continued to pull higher in their recovery and the bulls have looked to regain a degree of support today. Having broken the two month downtrend the corrective outlook has been neutralised. The difference now would be if a rally above $1.1880 can be achieved. The hourly chart is interesting as the momentum indicators remain in recovery mode with the hourly RSI holding above 40 and MACD lines bottoming around neutral. The support is growing near term at $1.1755 and the market will look to hold above $1.1800 which has been a resistance in previous days. Resistance is strong between $1.1860/$1.1880 but if the bulls can make the break a move back towards $1.2000 would be on.
The weakening dollar is helping to pull Cable higher. The market has been consolidating in a range between $1.3025/$1.3335 for six weeks but a push above $1.3230 overnight is beginning to generate some upside momentum within this range again. A close above $1.3230 would leave open the highs of the range again. However on a medium term basis, the daily momentum indicators remain very tepid and the range looks well set to continue. That reduces the likelihood of an upside break and that rallies within the range are likely to be seen as a chance to sell. The hourly chart shows resistance between $1.3300/$1.3335. Initial support is $1.3200/$1.3230 and on a near term basis the market is in rally mode. But for how long? Support grows at $1.3130.
The recent downtrend continues to build and the corrective outlook within the medium term trading range is intact. Yesterday’s rally seems to have failed around the overhead supply of the neckline of the three week top pattern and the market is once more falling away. Overnight we have seen the pair fall to a new four week low and seems set to leave another bearish candle. The momentum indicators are leading the market lower with the RSI falling decisively below 50 at a 10 week low, whilst the MACD and Stochastics remain firmly in a corrective outlook. Subsequently rallies remain a chance to sell. The hourly chart shows a series of lower highs, whilst yesterday’s rally has left resistance around 113.30. It is also interesting to see that the momentum indicators on the hourly chart reflect the selling into strength, with the RSI failing at 60 and MACD lines struggling around neutral. Below support at 112.30 the next real support is not until 111.65.
The recent consolidation phase continues with a mild sequence of higher lows and the slightest near term bullish bias. The recent run of daily candles reflects the very mixed outlook of the market, with the last three one day candles shaping as a bull hammer, bear shooting star and yesterday a doji. This is reflected in the momentum indicators which show almost no signs of any discernible direction. The very short term traders will note that there is a slight run of higher lows (at $1263, $1265, $1270.50 and now possibly $1275) to accompany the slight higher highs that are gradually putting pressure on the resistance at $1291. The overnight move higher starts the day in a positive manner but the hourly chart shows momentum indicators oscillating with the RSI up around 70 again which seems to be limiting the gains. Until there is a decisive breakout above $1290 or below $1260 the outlook remains a difficult trade.
The near term corrective move is still in play with the downtrend of the past seven days falling today at $56.15. This comes with the momentum indicators which remain corrective in the MACD lines declining and Stochastics also falling decisively. Despite this though the market has spent the past two days posting inside day sessions above Tuesday’s low of $54.80, whilst early moves today suggest this consolidation continues. However this does still look to be a consolidation within a corrective move, with configuration of the hourly chart also suggesting that intraday rallies are a chance to sell. The hourly RSI continues to struggle below 60 whilst the hourly MACD lines are failing under neutral. Initial support is $55.55/$55.80. A move below $54.80 would re-open the breakout support of $53.75.
Dow Jones Industrial Average
A strong jump back into equities has seemingly saved the Dow from completing a near term top pattern. At least for now this has broken a sequence of lower highs which was threatening a corrective phase. The bulls will now be eying that is in effect now a mid-range pivot at 23,485 which will be seen as a near term gauge for the prospects of completing the top. If the market pushes sustainably above 23,485 then the top will be increasingly unlikely. The reaction today to yesterday’s strong bull move will also be key. Another positive candle would confirm the move in the eyes of the bulls. The hourly chart shows that there is still more to be done with the MACD and RSI still, which would mean the hourly RSI holding above 60 and hourly MACD lines above neutral. There is an gap now open at 23,345 and it will also be interesting to see how this gap is treated in the coming days. Key support around 23,250 has been bolstered by the rebound.