Last updated: May 3rd, 2017 at 09:58 pm
There is a cautious mood that is beginning to take over markets once more. With forex markets starting to move back into safer haven plays such as the yen and the US dollar, the recent slide in the gold price is beginning to consolidate and equities are showing signs of correction. With the oil price still being sold into at lower levels and this is a concern for markets. Are we about to encounter some profit-taking in equity markets that have had such a strong run higher? Wall Street may have been able to squeeze out some further gains but Asian markets have been cautiously lower overnight and this is reflected in the early trading on European markets. The recent risk improvement has coincided with a correction on the safe haven Japanese yen, but after 600 pips of correction there are signs of some profit-taking beginning to seep through. Several of the markets I look at seem to be in need of a catalyst now as consolidations have taken over as the conviction of the recent moves seems to have been lost.
In forex markets today, the yen is the outperforming major currency, whilst the dollar is stronger against all of the other majors, with sterling lower again. The big underperformers are the Aussie and the Kiwi, which are over a percent lower against the US dollar on expectation that the RBNZ is getting ready to cut the interest rate. Gold is finding some support again today, whilst the oil price is lower by around half a percent.
Traders will be watching out of UK CPI at 0930BST for the month of June to see if Brexit is impacting through the data yet. Expectation is that the headline will increase to +0.4% (from +0.3%) and the core data will be +1.3% (from +1.2%). German ZEW Economic Sentiment is at 1000BST and is expected to fall to 9.0 (from 19.2 last month which was a 10 month high). The US Building Permits are at 1330BST with 1.15m expected (1.14m last) along with Housing Starts 1.17m expected (1.16m last).
Chart of the Day – AUD/USD
The rally on the Aussie that has seen a rebound from $0.7300 over the past three weeks is beginning to look somewhat precarious now. A bearish engulfing candle formed on Friday left a high at $0.7673 which was in effect a false upside break following on from the late June pre-Brexit key high. With yesterday’s muted attempt at a recovery showing that the bulls were unable to gain any real traction in a rebound, the downside momentum has gathered today and the bulls have lost control. A confirmed Stochastics sell signal is a third such signal in the past four months, each of which have previously worked (especially the April signal which was also accompanied by a bearish engulfing candle which formed a key high). The hourly chart shows the hourly momentum in the past couple becoming increasingly tired, with the MACD lines having been positive for the past two weeks of the rally, now into bearish configuration and the hourly RSI also tailing off. The hourly chart shows a breach overnight of the support at $0.7575 which completed a small top pattern and imply around 100 pips of initial downside towards $0.7475, whilst the next support at $0.7520 has also been breached. Next key support is $0.7467 with $0.7405 also important. The initial resistance is $0.7560/$0.7575.
Once more there is a lack of direction on the euro as the range period continues. Last Friday’s strongly bearish candle looked to be hinting at further weakness to come after the close below $1.1050 was a three week closing low, however yesterday’s rebound suggests the bears are still unable to gain full control. Subsequently the price is back inside the long term pivot range between $1.1050/$1.1100. However momentum is largely bearish and shows that rallies are being sold into, despite the very near term perspective a touch more mixed as the Stochastics cross lower and the MACD lines cross higher. The hourly chart shows a minor band of resistance $1.1070/$1.1100, with the important resistance starting at $1.1150 up towards $1.1188. I still favour a downside break, a test of $1.1000 and below, but it is as though there needs to be a catalyst now.
The recovery in Cable since the political uncertainty from Brexit was calmed by the announcement of Theresa May as Prime Minister last week seems to be dissipating now as the market has unwound back from the reaction high at $1.3480 and seems to have lost the bull momentum. This move has simply unwound the RSI from oversold and looks to have helped to renew downside potential. The Stochastics are in a similar position and are beginning to roll over again. There has been no explicit sell signal yet, but the hourly chart momentum indicators reflect a more corrective outlook with the MACD lines now beginning to turn lower around neutral. Yesterday’s drift rally failed at $1.3310 as the bulls were unable to find the traction in a recovery. This will now put pressure back on $1.3200 which is an old support which is again being tested. A move below $1.3130 which was Friday’s low would start the bear momentum off again and open $1.3100 and then $1.3047.
The rally on Dollar/Yen is still in play and is now over 600 pips, and the current resistance around 106.30 is only around 50 pips from a key breakout. The momentum on the daily chart is still with the recovery, however I continue to expect a key reaction high below this key resistance at 106.80. Furthermore I also believe that the momentum in the recovery is beginning to slow. The question is whether this is a pause for breath by the bulls or the beginning of a topping process. The hourly chart shows the slowing best with the falling away of the momentum indicators as the price has been pushing higher. This is especially evident on the MACD lines but also the RSI too. The support at 104.62 from Friday’s low is key to the continuation of the recovery now.
The gold price has just entered into a period of consolidation in the past few days. The corrective outlook is still in force on the daily chart with the Stochastics still falling and MACD lines having recently crossed lower, but the pace of the selling pressure is much reduced now. The price has spent the past three completed sessions finding support around $1320 and the bodies of the candles have become much smaller which reflects an uncertainty. The hourly chart shows that momentum is becoming increasingly neutralised, whilst there is a pivot band at $1335 which is capping the near term bounces (again this happened almost to the tick yesterday). I continue to see this as a near term correction play and that an ideal buying area for medium term longs would be at the breakout of $1306. The settling down of the price would suggest that a catalyst could now be needed to drive the next direction.
The bulls are really struggling against a headwind of negative momentum as rallies continue to be sold into at lower levels. Once more the rally of Thursday and Friday last week could not manage to find the upside traction before the selling pressure returned again. This has dragged the price back below the $45.83 neckline of the top pattern and old support which is increasingly being seen as a barometer for near term control. Whilst there is little real direction over the past week, there is resistance building with last week’s reaction high at $46.93 well below the pivot that had been in place during May and June between $48.00/$48.50. The latest reaction lower has added to the resistance near term at $46.33. The momentum indicators are concerning here with the RSI showing consistent lower highs, a declining set of MACD lines and negatively configured Stochastics. Despite this though, whilst last week’s low at $44.42 remains intact as a support there will be a nagging doubt for the bears. However, below $44.42 re-opens the next key low at $43.03.
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