Markets seem to be moving into a consolidation mode early Friday morning. The news that China has so far kept to it word on not seeming to be willing to continue to devalue the yuan has left traders pensive. The daily fix on the yuan was slightly below that of the previous day and breaks a sequence of three consecutive devaluations. Another concern weighing on sentiment is the oil price which yesterday broke back below the multi-year low of $42.03 on WTI. Furthermore, traders need to weigh up the impact of the Greek bailout which was debated in the Greek Parliament all through the night and is of key discussion also for Greek finance ministers today. Greece owes the ECB €3.5bn on 20th August and may need to have as much as €6bn of bridge financing apparently according to a European Commission proposal if the finance ministers are unable to agree on a proposal.
Equity markets on Wall Street were broadly flat into the close with the S&P 500 off 0.1%, with Asian markets also mixed to slightly lower (Nikkei 225 was off 0.3%). In keeping with this, European markets are also flat to slightly weaker today. Forex markets are showing very little direction as the European session takes over, whilst gold and silver are also around the flat-line.
Traders will be on the lookout for key Eurozone data this morning with growth and inflation on the agenda at 1000BST. The final reading of July CPI is expected to come in at +0.2% again. However the flash reading of Eurozone GDP is expected to show growth improving to 1.3% for the year (above the 1.0% last month). If the German improvement in GDP early this morning (to 1.6% from 1.1% and a beat of the 1.5% expectation) then the omens look good. The other main focus will be stateside. Producer Prices Index for July is announced at 1330BST and is expected to the core reading dip to +0.5% from +0.8%. Industrial Production data will also be keenly watched at 1415BST, with monthly growth of +0.3% expected and capacity utilization of 78.0 (slightly up from 77.8 last month). The preliminary reading of the University of Michigan Consumer Sentiment is also at 1500BST and is expected to improve slightly from 93.1 to 93.5.
Chart of the Day – USD/CHF
There are some mixed signals currently showing on the chart of Dollar/Swiss. The pair has been in an uptrend channel since late June and the sharp correction on Wednesday hit the support of the channel and bounced to maintain the outlook. The “trend is your friend” so this has maintained the bull control over the medium term, however there are questions that this chart now poses. The momentum indicators are beginning to roll over, with the MACD lines beginning to cross over, and most prominently, the Stochastics moving back below the 80 line and giving a confirmed sell signal. The other concern I have with the bull control is on the intraday hourly chart. The hourly moving averages have all turned lower in bearish sequence for the first time during this big trend channel. The breakdown of the support that had been holding for the past week at 0.9800 has now turned into the near term resistance on the rebound. A move below the near term support at 0.9725 would also be a concern. Furthermore, the hourly momentum indicators have taken on far more of a corrective configuration now, especially with the hourly MACD. I would say that this all amounts to a very cautious outlook now and traders with long positions should take care. A decisive move back above 0.9800 would re-engage the bulls.
I see yesterday as something of a confirmation day. The change of outlook that I believe took place after the euro broke above $1.1130 has been confirmed. The slide that took place was above to find a low at $1.1080 before bouncing again. This bounced above the 144 day moving average which has previously acted as the consistent resistance. The RSI for the daily chart is back at 60 and the Stochastics and MACD also continue to rise. Subsequently having been sharply lower, the euro only closed marginally off and has maintained that move today. The intraday hourly chart shows a retreat back to find support around a now five day uptrend and the buyers have returned to support. This leaves the key near term support at $1.1080 above further support at $1.1020. I believe the outlook is far more uncertain as a result of the past few days and the bulls have lost control now. Resistance is quite sizeable overhead at $1.1215 but the euro bulls have fought back.
Cable remains rangebound. I must have written that opening line on numerous times in the past few weeks but this remains the case. The “doji” candle (denoting uncertainty with the recent move) we saw yesterday adds further weight to the argument that the only strategy is to play Cable on a short term basis within the range. The momentum indicators on the daily chart are all but useless so use the hourly chart for the near term signals, the hourly RSI for example remains a good signal for this range play. The Fibonacci retracements of the $1.5188/$1.5928 rally remain as good reference points to play the range. Using rallies towards the 38.2% Fib at $1.5646 is a decent area for positions back towards the 50% Fib level at $1.5558 which is consistently being used as a level the pair retreats back to within the range. The key resistance at $1.5690 remains in place.
We are not a great deal wiser on Dollar/Yen today than we were yesterday. The bearish engulfing/Key one day reversal is still an overriding near term feature that suggests the bears are gaining ground, whilst the Stochastics continue to deteriorate and are now declining at a 4 week low. This means that I am very much undecided as to how to play Dollar/Yen for the time being. I would say my trigger level for how to approach the strategy would be a break back below 124.00. This has been a supportive area in the last couple of weeks and if the dollar bulls lost it again it would suggest to me a correction was on. It wold then open a move back towards the next support at 123.00. The very tight doji candle for today’s trade reflects a degree of caution that I would certainly concur. The intraday hourly chart shows the broken uptrend channel and there is resistance initially at 124.60/124.80. The hourly moving averages are now all falling in bearish sequence as the near term outlook continues to deteriorate.
It was a disappointing day for the gold bugs yesterday as the momentum that had been built up was unwound and gold lost around $14 from the $1126.30 high. However, all is not yet lost. The daily chart shows continued positivity on the momentum indicators and also the move could still just be unwinding back into support. The sequence of higher lows is still intact and the neckline of the near term base at $1105.60 is also still there. I think today will now be important though. Often you can see a corrective move in the day following a strong candle (i.e. what we saw yesterday after Wednesday). However if this corrective move continues into a second day then there is trouble brewing. There is currently a consolidation forming with support building around $1112 and the hourly momentum indicators seem to be finding a low. Whilst the sequence of higher lows remains intact on the hourly chart you can afford to remain positive. However the gold bugs need to return quickly now.
After starting to fall back 7 weeks ago from $61.57, the WTI price has now breached the March low of $42.03, a fall of over 30% in that time. The concern is that this decline shows little sign of finding any support any time soon. The breach of the March low opens $40 as an immediate support, but there is almost no support to prevent a retest of the December 2008/February 2009 lows at $32.40/$33.50. The downtrend over those 7 weeks remains firmly intact and the minor rallies are seen as a chance to sell, with the downtrend coming in at $44.18 today. Momentum remains incredibly bearish and there is almost nothing that the bulls can point to as a sign of hope that the selling pressure will dissipate. The intraday hourly chart shows that the bounces in the price that do seem to come through on a daily basis to help unwind the hourly RSI from oversold continue to be used as a chance to sell. Furthermore, the previous lows become resistance for the rallies, the latest now leaving overhead supply between $43.50/$43.85. The first even remotely key resistance comes in around $45.