If the oil price continues to be a positive correlation for risk appetite then traders could be in for a corrective day today. The oil price did not fall so hard on Monday in the wake of the Doha meeting disappointment because of the oil strike in Kuwait. Taking out around 1.8m barrels of oil from daily production gave prices a boost, however the oil strike has now come to an end. The oil price has subsequently started to fall again and once again the direction of the oil price is driving sentiment as markets react accordingly. Equities on Wall Street came off their highs (S&P 500 closed up 0.3%), Treasury yields have fallen and the risk appetite that had pushed through the forex markets yesterday is reversing. The US dollar has strengthened, but more as a safe haven play, because the yen is the best performing forex major currency today. Asian equity markets were mixed overnight with the Nikkei +0.2% higher, whilst European markets are opening with a corrective feel. If the oil price continues to fall back then there will be a continuation of this corrective feel across markets and risk appetite will suffer.
The outlook across the forex markets looks rather weak for risk, with the Aussie and the Kiwi retracing some of yesterday’s losses and the Canadian loonie weaker (on its positive correlation to oil). Gold has also slipped back on its negative correlation to the dollar, whilst most importantly of all, the oil price is over 2% lower.
Traders will be on the lookout for UK employment data at 0930BST. The average weekly earnings (ex-bonus) is expected to remain at +2.2% but this is certainly a mover for sterling so watch for any surprises, whilst the unemployment rate is expected to stay at 5.1%. The US existing home sales is at 1500BST and is expected to show a 3.5% improvement to 5.3m, with the bulls needing a positive number in the wake of a couple of less than impressive housing numbers. The EIA weekly crude oil inventories at 1530BST is expected to show a build of 2.8m barrels (down from 6.6m last week).
Chart of the Day – GBP/JPY
A huge turnaround in market risk appetite in the past couple of days has resulted in a sharp sterling rally against the yen, but is the move a game changer? The answer is that the bulls have made some impressive ground, but there are some significant technical barriers overhead that need to be overcome for this to be anything more than merely another bear market raly. A bullish engulfing candle (bullish key one day reversal) on Monday was followed up by a strongly positive candle yesterday, a move that has taken the pair strongly through last week’s reaction high at 155.75. This has opened the resistance of the old mid-March low at 158.40. However, this resistance also currently coincides with resistance from a downtrend that dates back to early December. Furthermore, although the near term RSI has been improving, the previous rallies have floundered with the RSI between 52/56, with the current move hitting around 49 yesterday . The other momentum indicators also suggest that rallies continue to be seen as a chance to sell, with negative medium term configuration on the Stochastics and MACD lines. Therefore the session today becomes important for this current rally which could simply be seen as another chance to sell, already in the Asian session the rebound is beginning to falter. Interestingly the hourly chart shows a near term base pattern that implies a rally to 159, however bear market rallies will often undershoot their recovery targets, so I would see 158.40 as a likely sell-zone now.
After a few days of rather tepid, luke-warm candles, the bulls put in more of a determined attempt with the rally yesterday. This move has resulted in almost 50 pips added on the day and a decisive move back above the near term resistance around $1.1330. This has resulted in the momentum indicators picking up slightly again and showing more of a positive bias. The hourly chart shows that despite some procrastination for a few hours yesterday eventually as the US session took hold the euro started to push higher. This move has meant that hourly momentum is more positive. The bulls will be looking at the previous near term resistance at $1.1330 to be supportive today as they attempt to maintain this recent rally. The resistance comes with yesterday’s high at $1.1385 and $1.1400, with $1.1465 being the long term range highs. I would be surprised that there is too much movement on the euro as tomorrow’s ECB meeting approaches though.
A second consecutive strong bullish candle has put Cable back at a medium term crossroads. The break above the near term resistance at $1.4347 means a new high for April has been posted and there is now some key overhead resistance under threat. The key lower reaction high at $1.4460 protects the March high at $1.4515 and this 55 pip band of resistance is key for the medium term outlook as a break above it would be a real sign of intent for the bulls. The resistance of the old downtrend channel has capped the upside for the last couple of months and today this comes in at $1.4420 which is almost to the pip the point of yesterday’s high. The momentum indicators have picked up again, but interestingly the RSI hit 58 yesterday with the rallies tending to fail around 60. The early dip back in the Asian session only adds to the tension for the bulls. They need to hold on to the support band around $1.4285/$1.4320 today to prevent a correction from gathering momentum now as the hourly studies have turned into reverse. An interesting moment for Cable.
I discussed yesterday the fact that Dollar/Yen was forming a near term range between the lows of 107.60/80 and the resistance now around 200 pips higher at 109.73. The price action over the past 24 hours backs up this assertion, with the daily chart showing a positive candle that has lost its upside momentum into the close. The rolling over has continued overnight and as the Asian session gives way the price is close to a full retracement of yesterday’s session. I still believe that the daily momentum indicators are simply unwinding the oversold position rather than any sustainable basing process. The hourly chart shows that momentum indicators are neutrally configured and the minor dollar rally seems to have lost its way. The high at 109.50 is now important as it could become a lower high, and with the hourly momentum indicators turning corrective the downside impetus for the near term is growing. A breach of 108.75 would confirm a small top pattern and imply 108.00.
Gold is a medium term range play and I expect this to continue. That means that as the price starts to move towards resistance levels within the range it gives us a chance to do a mean reversion trade. This is what we have seen yesterday. The move through the pivot resistance at $1243 triggered the bull move towards the start of the overhead key resistance that comes in around $1260. The resistance has since formed at $1258 with the correction setting in. The rally appears to have run out of steam again overnight and the corrective forces are pulling the price back towards the $1243 pivot again. There is a very slight bullish bias on the daily momentum indicators, with the rising 55 day moving average (currently $1231) acting as the basis of support. This means that the overnight dip could turn out to be a renewed buying opportunity. The hourly chart shows that there is a basis of support between $1235 and the pivot at $1243 and a buy signal here would be interesting. The pivot around $1225 is key support near term.
An oil workers’ strike in Kuwait was driven an incredible rally has since the intraday low at $37.60 early in Monday’s trading, however with the strike now over the price has started to fall away again. This is seemingly set to undo the strong recovery of the past couple of sessions. The entire gains from yesterday’s session have now been corrected and this leaves the prospect of a lower high in at $41.55. The momentum indicators are also not looking as positive, with the RSI falling away and the Stochastics lower. This correction is also reflected across the intraday hourly indicators and there is now a band of near term support between $39.50/$40.00 that is being tested. If this correction really begins to take hold then perhaps even Monday’s spike low at $37.60 could come under threat again?
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