With little, if anything, concrete coming out of an ineffective G20 summit over the weekend, financial markets have started to fall back again this morning. In fact it was discord over the use of ever looser monetary policy (in the form of negative interest rates) and currency wars that seem to be rankling the most. As for talk of better use of fiscal policy and structural reforms, this has been touted for a while, so the proof is in the pudding. Perhaps also, traders are positioning themselves for a hugely heavy week of tier one economic data which is set to drive volatility higher once more. The oil price looks largely steady as the intraday correction that dragged prices back from key resistance on Friday seems to have stabilised for now. However the safe haven plays are regaining come lost ground as the yen has pulled some strength once more and gold has developed some support. Furthermore, the equity market rebounds have just come off the top as some profit taking has set in, although this could be something to do with it being the end of the month too. Focus has also turned back on China with the equities again sharply lower in front of the latest round of key PMI data tomorrow. European markets have started the day trading lower too. Forex markets are not showing a great deal of direction other than the strengthening of the yen, however the Kiwi is also around half a percent lower. The market will be looking out for Eurozone inflation with the flash CPI out at 1000GMT which is expected to drop back to 0.0% (from +0.4%) whilst the core data is expected to dip back to +0.9% (from +1.0%). There is also the Chicago PMI at 1445GMT which is expected to drop back to 53.0 (from 55.6), with the pending home sales at 1500GMT expected to improve by +0.5%.
Chart of the Day – EUR/JPY
The pair has been in sharp decline since the latest rally topped out in late January around 132. The sharp acceleration lower had formed a positive reversal candlestick formation, completing a fine example of a “Morning Doji Star” reversal. However the sharp turnaround in sentiment on Monday morning now threatens the reversal credentials almost before it had begun and also threatens the near term recovery. The RSI has put in a basic crossover buy signal (move above 30), but already this is being questioned today, however the Stochastics are also close to a confirmed buy signal too. This market is on a knife edge now as there is certainly room for an unwinding rally with the old support band around 126 which were the old lows from late January/early February, however equally this could also be an unwinding move that gives another chance to sell. The intraday hourly chart show an interesting pivot has formed at 125, which put paid to Friday’s rally, however that also the initial support around 123.40 has just held this morning. The bulls will be eying another near term pivot at 124.20 today as a failure to rebound back above this would put the pressure back on the downside. It is certainly an interesting chart.
The euro is under increasing pressure. Having broken below $1.1050 (which is now the key basis of resistance), the pair has also retreated to put pressure on the uptrend that has been in place since the December low. I am looking at the momentum indicators which are not only negatively configured (especially the Stochastics) but also the RSI is on the brink of a real negative shift that would come on a move below 40. The pair is also close to trading below all the moving averages. These are all suggestions that the outlook is close to now pulling back for a test of the key medium term pivot around $1.0800. Rallies are now seen as a chance to sell with resistance forming at lower levels. The hourly chart shows the resistance now in place at $1.0955, $1.1000 and $1.1050. Expect further pressure back on Friday’s low at $1.0910 with the likelihood of $1.0800 at some stage being tested.
I continue to see rallies as a chance to sell with the resistance band between $1.4000 (which is a psychological big figure level) and $1.4080 (the old January low) increasing in importance. Friday’s candle would have been a real body blow for any bulls out there, as an attempted rally was shit down almost before it had begun, resulting in a big bearish outside day (bearish engulfing candle) with a close back at a new multi-year low. The RSI is back under 30 and yet still has further downside potential, whilst the MACD lines continue to fall and the Stochastics remain very negative. The hourly chart shows bearish configuration on the momentum and that rallies should be seen as a chance to sell still. Any sell signal between $1.3900/$1.4000 looks a good opportunity. Key near term resistance is now at $1.4045.
Is the rally already failing? What had seemed to be an almost text book bullish set of reversal candles to end last week, the reaction on Monday morning would have been significantly disappointing for the bulls. It looks as though the bullish sentiment of the recovery is being pushed aside in the Asian session with over 100 pips of downside, however, it will be interesting to see how the Europeans react now. The daily momentum signals still retain a recovery outlook, with the MACD lines crossing higher and the Stochastics also positive. The market has paid scant regard to the 23.6% Fibonacci retracement so far (at 113.50) but it is the support of Friday’s low at 112.55 that will now be a key trigger now. The hourly chart shows this to be an important higher low in the recovery and if it is lost then the recovery outlook will be seriously questioned again. Key closing support remains at 112.00. The bulls need a reaction back above 113.15 and also 113.50 if possible to resume the recovery.
Since gold hit the high at $1261 the choppy consolidation has still managed to be trending higher, however the momentum indicators remain a concern for me. The deterioration of risk appetite across financial markets should be supportive for gold and so far the candle is mildly bullish. However the Stochastics have turned lower now and there has been a negative cross on the MACD lines. There is a regard being given to the 23.6% Fibonacci retracement of $1071 to $1261 at $1216 and this is still a barometer for gold, coming today as it does almost bang on the three week uptrend. The hourly chart shows the pivot at $1232 is now the overhead resistance and this is another interesting test today for the bulls. There is a feeling that the bulls are hanging on for now, but I am still conscious that the loss of momentum could put paid to the recovery. The support is now in at Friday’s low at $1211.
Can the oil price breakout or is the overhead resistance just too great? On Friday we saw both the price of Brent Crude looking to breakout above its equivalent resistance at $36.25, whilst on WTI the key late January high of $34.80 is the big overhead resistance. However, an initial look at the resistance failed and the price sharply retraced the move, with WTI completing a shooting star bearish candle (something which is not helping risk appetite across markets today). However looking at the RSI, the bulls look to be more resilient that they have been previously. The RSI on WTI is decisively above 50 and is the highest since November when the sell-off started from $48.35. The chart is close to completing a big double bottom but is not quite there yet. However, looking at the hourly chart, the outlook remains positive with the technical indicators bullishly configured, whilst the 144 hour moving average currently at $31.80 has supported the key higher reaction lows in the past 9 days. Corrections are being bought into at higher levels and there is a basis of support in the band of support $32.00/$32.80. The bulls may yet still have another go at that key $34.80 resistance.