Markets in consolidation mode ahead of key risk events

Market Overview

Traders are taking a pause for breath as markets hit consolidation mode ahead of three key risk events that will hit in the next couple of days. On Thursday, markets will face the ECB monetary policy meeting, the testimony of former FBI James Comey and the UK General Election. Although the UK election will not start to impact markets until Thursday night, the potential volatility will be huge and traders appear unwilling to take a view with the opinion polls giving such a wide range of views. The ECB is another key risk factor, with the Governing Council potentially on the brink of a subtle yet significant shift in policy stance. Finally, there will also be the uncertainty created from the testimony of James Comey to the Senate Intelligence Committee in which he could add fuel to the fire of talk of impeachment of President Trump. In the least, Comey could make the task of Trump’s fiscal expansion plans even harder. Subsequently, it appears that traders are sitting on their hands. There has been a mild rebound in Treasury yields which has helped to stabilise the US dollar decline, however there is little real direction on forex, whilst equity markets are also lacking intent today.

Trader relaxed

Wall Street closed lower yesterday with the S&P 500 -0.3% at 2429, whilst Asian markets were mixed with the Nikkei all but flat and European markets are mixed in early moves. In forex, there is almost no significant direction other than the Aussie which is outperforming today as Australian GDP came in marginally ahead of expectations. Gold is a touch lighter, but oil has just dipped back again after yesterday’s rally into the close.

Once more there is little on the economic calendar for today with the EIA Oil Inventories at 1530BST the main focus. Crude oil stocks have been in drawdown for eight consecutive weeks and after a decline of -6.4m barrels last week there is expectation of a further 3.5m barrels of drawdown. The distillates are expected to add 1.0m barrels whilst gasoline stocks are also expected to add 1.0 m barrels.

 

Chart of the Day – Silver

The recovery in silver continues. This comes with the increasingly positive configuration on the momentum indicators, with the RSI pushing strongly now above 60 (the February and April rallies pushed to 65/70) whilst the MACD lines are now rising above neutral and Stochastics strong. The recovery has formed a well-defined uptrend channel and with the price moving along the upper bound of the Bollinger Bands, the outlook remains strong. Key support was left with last week’s low at $16.96, whilst breakout above $17.47 has left this as support now. The rebound in the past few weeks has now retraced to the 61.8% Fibonacci retracement of the $18.65/$16.01 sell-off of April/early May at $17.64. The continuation of the recovery now means the market is on course for the next Fib level which is 76.4% at $18.02. This coincides with the next resistance at $18.00. The hourly chart shows strong momentum configuration and intraday corrections being bought into as the recovery continues.

EUR/USD

The euro is consolidating ahead of the key risk event of the week with the ECB monetary policy meeting tomorrow. The last two candles have all but been equal and opposite but with both failing to breach the support at $1.1200 or the resistance of Friday’s high at $1.1285. Once more the early moves today suggest consolidation. This comes with the momentum indicators still strongly configured to suggest this is the bulls biding their time. The hourly chart reflects the consolidation as hourly momentum indicators become increasingly settled. Technically the euro remains in a bull run and corrections remain a chance to buy. Near term key support remains $1.1100 with the resistance at $1.130 and the medium term base pattern target at $1.1350.

GBP/USD

There is considerable uncertainty over the outcome of the UK General Election which takes place tomorrow. Aside from the strong bull candle on Monday, many of the recent candlesticks have had small bodies, which represents a degree of caution and uncertainty. Yesterday’s candle was just that again. There is a bullish bias as Cable has pulled away from $1.2775 again but a lack of conviction. Momentum indicators are highly uncertain but the market appears unwilling to take any real view ahead of the volatility which is likely to be ramped up significantly tomorrow night. Since testing the long term breakout support of $1.2775 last week, the pair has put together a run of higher lows, with the latest at $1.2870 from yesterday. The hourly chart shows the slightest of positive bias to the hourly momentum with decent support at $1.2830 but resistance from yesterday’s high at $1.2950. The main resistance builds up above $1.3000 with $1.3050 still key. Expect this consolidation to continue today.

USD/JPY

A sharp bear candle has decisively broken to the downside below the support at 110.20. Momentum indicators are increasingly bearish with the RSI confirming the breakdown on a move below 40, the MACD lines falling below neutral and the Stochastics below 20. The 50% Fibonacci retracement of the 100.07/118.65 bull run comes in at 109.35 and is an area of potential consolidation. It is interesting to see this Fib level being considered as supportive today. However aside from a brief rebound of a few days, the market has been corrective for the past four weeks and rallies have continued to be sold into. The old support of 110.20 is the immediate basis of resistance now with a band of resistance 110.20/110.45 as an area of overhead supply. Having broken 110.20 support the next major support does not come in until 108.10 from the key April low.

Gold

The bull run that has been in place since the key May low has been pushing strongly higher in recent sessions and has now entirely retraced back to the key April high of $1295.40. This comes with momentum indicators in strong bullish configuration. The RSI is pushing towards 70, the MACD lines are accelerating higher and the Stochastics also strong. The question will now be whether the market can push through the key long term pivot band $1300/$1310 which contained many key turning points throughout the middle of 2016. The initial reaction today is marginally lower, falling back from $1296, however the bulls remain in control. Hourly momentum reflects an unwinding move with support initially at $1283.20 and $1277.50. Corrections continue to be used as a chance to buy.

WTI Oil

Will yesterday’s bullish recovery candle do anything to change the slide in the oil price? There is much that needs to be done but the bulls will have been happy. The first positive close in well over a week now needs to be followed by a strong session again today. This is because rallies have been seen as a chance to sell whilst there is little real resistance that has yet to be breached. The pullback to the neckline of the small top pattern below $48.00, with the hourly chart showing a band of resistance $48.00/$48.42 which remains intact.  However it is interesting to see that the pivot of the past few months at $47.00 as had consistent pressure on it in the past three sessions and following yesterday’s bounce, the market has failed to decisively breach the pivot. Despite this though the momentum remains negative with all RSI, MACD and Stochastics lines in negative configuration. For now, rallies are a chance to sell and another failure today would put pressure back on $47.00 where a close below the support would re-open the downside. Resistance at $49.17 is increasing in importance.

Dow Jones Industrial Average

The Dow has turned near term corrective but the move is still likely to be used as another chance to buy. The old highs of April and May are a basis of breakout support now between 21,070/21,112 and will be seen as a first line of support for a pullback following the correction back from the new all-time high at 21,225. Momentum indicators remain strongly configured and the bulls remain in control. The hourly chart is simply unwinding bullish momentum with the buyers tending to return around 30/40 on the hourly RSI and around neutral on the MACD lines. Below 20,943 support threatens the immediate bullish outlook.


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