The correction of oil in the past few weeks has been a real signal for market concerns over risk appetite and struggling growth. A bear market in West Texas Intermediate oil has been formed. However, over the weekend a meeting between OPEC and other major oil producing nations warned about oversupply and that some action could be taken to curb the potential imbalance that this would cause the market and are looking to respond. Saudi Arabia has announced it will reduce its production by around 500,000 barrels per day in December (which is around 0.5% of global production). OPEC will also now formally discuss any changes to production in its bi-annual December meeting. This move has been enough for oil to break a sequence of losses and threatens a technical rally now. The problem is that the US could quickly swallow this by it continued increase to its own production. The Baker Hughes rig count keeps rising (now its highest since March 2015) and if this continues then any production that the Saudis take out of the system will simply be replaced. However, the Saudi announcement has been enough to initially stabilise the selling pressure this morning. Risk appetite will be suitably stabilised from this. Perhaps, given that today is Veterans Day in the US, we will not get a true reflection of whether sentiment is sustainably turning a corner, but this is at least for now a welcome degree of support. Aside from oil, Monday morning tends to always be big for sterling as weekend press reports speculate on Brexit progress, and today seems to be no different. The weekend papers are now talking about the maths of Brexit and how it may not matter what deal Prime Minister May can achieve with the EU, as the numbers look to be against her in Parliament for her version of a deal. With more Brexit bumps in the road, sterling is being hit hard as a result.
Wall Street closed lower on Friday with the Dow -0.8% and the S&P 500 falling -0.9% at 2781. However, futures are initially supported and higher by around +0.3% today, which is helping Asian markets find support (Nikkei +0.1% and Shanghai Composite +1.2%). This is helping European markets higher in early moves, with FTSE 100 outperforming on sterling weakness. In forex, sterling is selling sharply lower by over 100 pips against the dollar. This is also dragging on the euro which has broken below $1.1300 to a 17 month low. In commodities, the dollar strength is continuing to weigh on gold, whilst oil is finally looking to build support after the precipitous losses recently.
There are now key economic releases on the calendar today. The US has a public holiday for Veterans Day so this may mean thinner trading volumes and potentially elevated volatility of price action.
Chart of the Day – Silver
The concerns over the implications of slowing inflation trends in China have impacted negatively on commodity prices and have meant that silver broken a key near term recovery support on Friday. The higher low of $14.20 was broken by a decisive negative candle, and confirmed on a closing break. Coming with the deterioration in momentum indicators as the RSI fell back below 40 and the MACD lines started to find negative traction following a “bear kiss”. Having closed below $14.20 that market is now open for a retreat to $13.90 which is the key September low. The hourly chart shows the barrier of overhead supply now at $14.20/$14.40 which is now a basis of resistance for intraday rallies today. Another failure in this band here would be a really negative signal.
The euro is back under pressure again. The technical rally dissipated at the old pivot of $1.1500 in the middle of last week and the market has since been posting a series of negative candles and with weakness continuing this morning, the key floor at $1.1300 is being broken. The concern for the bulls is that momentum has swing decisively lower again and comes with downside potential where the RSI is falling in the low 30s, MACD lines are crossing lower again and the Stochastics are also accelerating lower. A closing breach of $1.1300 opens the next leg lower towards a test of support at $1.1110 which would be a 15 month low. The hourly chart shows that intraday rallies are a chance to sell, with resistance now at the old floor of $1.1300 and then $1.1360 initially.
Sterling is falling back again as Cable has gathered downside momentum in a renewed corrective move. Two decisive bear candles closed last week and the move on Monday morning is more of the same. Closing decisively below $1.3000 on Friday , the market has also now moved below the support band $1.2920/$1.2950 and this is opening the way for a move back towards the range lows once more at $1.2695 (October low) and $1.2660 (the August low). The momentum indicators are negatively configured now and have turned lower again with downside potential. The RSI is falling back below 50, whilst the MACD lines are crossing lower, and the Stochastics have just posted another bear cross. The last Stochastics sell signal was in October when the market then embarked upon a decisive run lower. The old support at $1.2920/$1.2950 is now a basis of initial resistance, with $1.3000 now a near term psychological ceiling.
The market continues to pull higher within a two week uptrend and mini corrections are a chance to buy. The trend support is at 13.45 today which is just above the 113,15/113,40 support band and it is interesting to see the pullback on Friday finding support around 113.65 with the dollar bulls finding the opportunity this morning. A close back above 114.10 (initial resistance) would re-open the 114.55 key high. Momentum indicators are calling for the move, with the MACD and Stochastics lines still pulling higher, with the RSI positively configured above 60. The hourly chart shows the strength of momentum also, with the hourly RSI again bottoming in the low 40s, whilst the MACD lines swing higher from a cross at neutral. The breakout supports 113.15/113.40 are still a good buy zone, whilst the support band 112.55/112.90 is increasingly important near term. Resistance is 114.55/114.70 which is a zone of key highs posted throughout the past 20 months. Above there is 115.60.
The gold bulls are hanging on to their positive outlook by their fingernails now. Having drifted lower over the past week, Friday’s solid negative candle has taken gold below support at $1211 to a four week low and the breakout support is under threat. There has been a support band $1208/$1217 which is seen as a source of underlying demand for gold. An intraday breach was seen on Friday but without the closing break. Another intraday move lower is being seen today. If the market breaches $1208 on a closing basis it would market a significant shift in outlook, especially if it came with a breach of $1200 again. Momentum has swung suitable corrective now and certainly points to negative near term outlook. Below $1200 opens $1181 again. The market needs to quickly regather its poise and trade back above $1217 again to enable a more positive outlook to resurface.
WTI remains deeply negative but the technical position has become incredibly stretched now and in the knowledge that nothing falls in a straight line forever, the chances of a technical rally are growing. The OPEC meeting over the weekend now seems to be pulling for a technical rally to kick in. The question is whether a rally would even make any difference? The market failed to hold a breach of $60 on Friday (old March low but also psychological level) but the RSI was more stretched than at any time since January 2016 and a move to unwind the oversold position could easily be seen now. The resistance of a four week downtrend comes in at $62.70 which is now below the key medium term overhead supply of $63.60/$64.50 (which is effectively 5% higher now). So there could easily be a decent sized rebound and still the outlook would remain corrective. Friday’s low at $59.25 is now the initial support.
Dow Jones Industrial Average
Intraday volatility on the Dow remains elevated and there is still a tendency for the market to swing around fairly wildly. The recovery move in the past couple of weeks has had bumps in the road but has also been fairly decisive higher. The key is now to how the market reacts to Friday’s negative candle. Momentum indicators are at levels at which a near term technical rally could begin to dissipate, so the bulls need to be careful. The Stochastics are potentially set to cross lower, the MACD lines are just unwinding to neutral, whilst the RSI halted its rally last week at 60. Resistance has been left at 26,278, whilst Friday’s low at 25,883 will be a key near term signal too. For now this corrective slip is a chance to buy, with the hourly chart momentum indicators still positively configured. But if the hourly RSI drops back below 40 and MACD lines go negative again, this would be a warning.
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