Last updated: May 3rd, 2017 at 09:58 pm
In the run up to the Easter holidays, financial markets are beginning to struggle for direction and the comments from a couple of hawkish FOMC members are simply muddying the waters further. Wall Street may have risen yet again, but not by much (S&P 500 up a marginal +0.1%) but with volumes subdued and technical momentum indicators reaching levels associated with becoming overbought (the 14 day RSI on the S&P 500 is now up at 69), this could mean that markets struggle to generate the impetus for further gains. To add to the uncertainty, Atlanta Fed President Dennis Lockhart has claimed that a Fed rate hike in the April meeting is still a possibility. Lockhart is a hawk so comments such as this should come as no real surprise, but seeing as the market is still digesting such a dovish shift from the Fed last week, this does little to help markets to understand the Fed move. Fellow hawk on the FOMC, John Williams, also made similar hawkish comments. The oil price continuing to move higher is supportive for market sentiment, with WTI rolling over to the May contract today showing further gains. Asian markets were broadly mixed overnight with the Nikkei up 1.9% as it plays catch up from yesterday’s public holiday and accounting for a weakening of the yen. European markets are lower at the open as breaking news of a potential terrorist attack hits Brussels airport.
Forex markets are showing very little direction against the dollar with a degree of stability today. There is though one main exception is the Aussie which has been moving higher today despite RBA Governor Glenn Stevens’ attempt to jawbone it lower. Gold is stronger today too up $10 which may also be contributing to the Aussie strength. The oil price is marginally higher.
There is a hefty European calendar today with the flash PMIs early in the session culminating with the Eurozone composite PMI at 0900GMT expected to be 53.0. The German Ifo Business Climate is at 0900GMT also which is expected to improve marginally to 106.0 (from 105.7), whilst the German ZEW is an hour later at 1000GMT and is expected to buck the trend and pick up to 5.0 (from 1.0 last month). UK inflation data is at 0930GMT and is expected to show a mild pick up in the year on year headline CPI to +0.4%, with the core data expected to stick at +1.2%. The Richmond Fed manufacturing index is at 1400GMT and is expected to improve slightly to -1 (from -4).
Chart of the Day – DAX Xetra
There is a bit of a mixed outlook near term on the DAX with a series of very messy and indeterminate candles surround last Thursday’s sharp bear candle. However this is all happening around the consolidation zone of the 61.8% Fibonacci retracement at 9897 of the 8355/12,390 bull run of October 2014 to April 2015. This move is though also taking place still within a bull trend recovery that has been in place since the February low, a move which is also flanked by the rising 21 day moving average (at 9704) Yesterday’s sharp intraday retracement reflects the uncertainty of the bulls right now, but holding above the old breakout resistance around 9905 maintains a positive outlook and keeps the resistance at 10,122/10,165 open. The momentum indicators are mildly bullish but there is a degree of caution which is needed with regards to the rolling over of the Stochastics, which could be an early sign of strain for the bulls. I would remain bullish above 9900 whilst turning more neutral should last week’s reaction low at 9753 be breached, with initial support from yesterday’s low at 9853 being tested in the early moves today. A close back below the old pivot at 9600 would now be a concern.
I remain bullish for the upside bull flag pattern which still retains the prospect of a move towards the range highs. In the meantime we have seen the euro just consolidate a touch but there is a near term support around $1.1200/$1.1240 which formed from the breakout and this should be seen as a chance to buy. After a couple of days of slight pullback I expect the euro to build support once more and this is beginning to be seen overnight. The daily momentum indicators still look positive (although the Stochastics have just rolled over) but this is the time at which the bulls need to hold up otherwise the euro could drift back further towards the $1.1100 breakout. The hourly chart suggests that the unwinding move has sufficiently renewed the upside potential again and this is the time for the bulls to return. Failure to do so could put pressure back on $1.1100 once more.
Following on from the breakout in the wake of the dovish Fed move, the recent corrective move on Cable is somewhat similar to that of the euro. Sterling has unwound a portion of the strong move higher, but the dip back has just retraced to the 38.2% Fibonacci level of $1.4051/$1.4514 at $1.4337. It is also interesting that the Fib retracements coincide with the key levels to watch for near term. I spoke previously about the pivot around $1.4280, this is a level that comes in around the 50% Fib level and therefore would be the level at which the bulls have lost control in the rally. A near term basis of support at $1.4360 which was yesterday’s low has been breached and the bears seem to be controlling again today which means the retracement is set to continue. Having broken below the $1.4410 old pivot line support (basically at the 23.6% Fib retracement) this becomes the overhead barrier today and is an interesting near term watershed. An upside breach would re-engage the bulls and the high at $1.4515 again.
There may have been a third consecutive close below 112.00 as the US dollar has reclaimed some of its lost ground, but now the first real test of the appetite of the bulls comes today as the overhead supply of the old support around 112.15 is tested. Whilst the range of the past 5 months remains intact, my outlook has changed and I am far more negative about this range now. The momentum indicators are all configured in negative medium term formation and are positioned for a downside break ultimately, with rallies now a chance to sell. Subsequently, near term resistance ranges become selling opportunities as rallies are seen as unwinding moves for the next bout of downside pressure within the range. The hourly chart shows the overhead supply in the range now at 112.15 towards 112.60. Hourly momentum has unwound now and it is time to be on the lookout for the next near term sell signal. Support may have been left at 111.20 in the rebound but I expect the pivot at 111.75 to come back under pressure and the bears to reclaim control shortly.
A third negative candle added to the somewhat uncertain medium term outlook for gold whilst another sharp rally today has come as a potentially terrorist attack at Brussels airport has impacted market sentiment again. I am still advocating that the negative divergences on the momentum indicators are the reasons why gold has been unable to continue with its rally and could be in the process of rolling over. The overnight support for gold that has added around $15 has not changed that view for me but still makes the near term outlook increasingly uncertain. The hourly chart shows a break back above the pivot at $1247.50 which now re-opens the near term resistance around $1255 and this is a level which will determine whether the bulls can push back for the $1270.90 resistance again. Support has been left now with yesterday’s low at $1240.30 bolstering the $1237 pivot. This particularly choppy trading phase for gold continues.
The bulls have shrugged off fears over a correction to maintain control of the chart and push the price higher again. A near term dip (on the back of the Baker Hughes oil rig count increase) has bullishly formed support in the band of support $38.50/$39.00 where the buying intention has picked up again. The daily chart continues to show strong momentum indicators and that any dips are still being considered to be a chance to buy. With the rolling over into May as the front month contract we now have a breakout to further new multi-month highs with initial resistance around $42.00 whilst the and the big base pattern target of $43.50 is once more in view. Yesterday’s low at $38.60 has bolstered the support band $38.50/$39.00 with further support back at the pivot line of $37.35.
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