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Oil rally helping to hold up market sentiment


Market Overview

The dollar fell sharply on Friday as downside surprises on key retail sales and inflation disappointed. Markets have showed signs of stabilizing a bit this morning but with little key US data due this week there is a threat of a continued corrective move. Gold has turned a near term corner and is rebounding, whilst the yen is also reacting more positively on Friday. The yields on US Treasuries could be key to the dollar direction. However market sentiment on equities is not negative and is holding up, with the oil price having continued to recover as Russia and Saudi Arabia (the world’s two largest oil producers) propose extending the production cuts into March 2018.  Chinese data was mixed overnight. Industrial Production missed estimates with 6.5% (7.1% exp, 7.6% last month), whilst Retail Sales were marginally ahead at +10.7% (+10.6% exp, +10.9% last month). Given the move to rebalance China more towards consumer driven activity, the overall impact will be risk neutral.

crude oil up

Wall Street closed down slightly with the S&P 500 -0.1% at 2391. Asian markets were mixed to slightly weaker (Nikkei -0.1%) with European markets taking the positives out of the moves to help support the oi price In forex trading, the euro is holding on to the support, with Sterling looking decently supportive. Gold and silver are also hanging on to their improvements, whilst oil is up around 1.5%.

It is a quiet start to the week on the economic calendar. Empire State (New York Fed) Manufacturing is at 1330BST and is expected to pick up to +8.0 (from +5.2) whilst the NAHB Housing Market Index at 1500BST is expected to stay at 68.

 

Chart of the Day – S&P 500

There is a concern growing on Wall Street markets that a correction could be coming. This is reflected on both the Dow (see below) and the S&P 500. The S&P 500 failed to make a closing breakout into new all-time highs las week and pulled back from 2304 and now the momentum seems to be fading in the rally. The market is edging back towards a test of the 2380 support that was formed in early May. This comes with the momentum  indicators rolling over. Both the Stochastics and the MACD lines are close to bear cross sell signals (or at least profit taking signals). The last time such a sell signal was seen was in early March when the S&P was in correction mode for six weeks. Betting against the bulls on Wall Street tends to often be a risky game, however if the support is breached it would signal a further 20 ticks of correction. On a medium term basis this would turn the last few months into a trading range above the March low at 2322. The hourly chart shows Thursday’s late recovery failed around 2395 which is a near term pivot, whilst hourly momentum is at least neutral and beginning to show a negative bias. The support at 2380 is considerable on a near term basis and a breach would be key to the outlook in the coming days.

EUR/USD

Fridays strong bull candle has improved the outlook once more. The support around $1.0850 has been bolstered by another session that formed a low around a level that has been a floor in recent weeks. The momentum indicators are more benign now with the RSI stabilising above 50 and the MACD lines also flattening. The range between $1.0850 and below the high at $1.1022 seems set to continue for now. The early moves today are lacking real direction but there is no sense that Friday’s rebound will lose ground again. The hourly chart shows support at $1.0900/$1.0910. Resistance is in a minor pivot at $1.0950 before the bigger resistance at $1.1022 comes in.

GBP/USD

The market is still in a position of posting higher lows over the past few weeks but the pace of the advance is struggling to be sustained now. The rolling over of momentum indicators suggests that this phase of trading could be more of a range now than a continued advance. The support of Friday’s low at $1.2847 just held up above the previous reaction low at $1.2830 and it will be interesting now to see how the bulls react in the coming days. If this is to be a continue bull run then the buying pressure should now re-engage and break out once more. However, with the deterioration in the momentum this looks difficult now. It is more likely that the buying will become stunted and the market develop into a range trade between $1.2775/$1.2990. The hourly chart shows a break above $1.2900 which is a near term pivot to open near term resistance at $1.2950 before the recent high at $1.2990. However the hourly momentum is already back around levels where the bulls could begin to struggle. The prospect of a decisive upside move looks less likely from here.

USD/JPY

Friday’s second consecutive negative candle was something not seen since the recovery began four weeks ago. The move has also broken the uptrend and comes with momentum indicators beginning to tail off. There have been no explicit sell signals yet on momentum but the bull control is being questioned. The latest breakout support at 113.05 held up to scrutiny this morning but the market has not left decisive support yet. The hourly chart could be key with the old support at 113.60 potentially now becoming a basis of resistance. If the market makes another lower high below 114.00 then the sellers could begin to gain traction. Hourly momentum is more correctively configured now. Below 113.05 opens 112.35 and 112.05 supports. A retreat into the key medium term support band 111.60/112.20 should not be ruled out.

Gold

With gold posting a second successive bull candle the potential that this could turn into a bigger rally is growing. However the market has been trending lower for four weeks now and this simply looks to be unwinding within the downtrend. There is key near term resistance that needs to now be watched with the minor reaction high at $1236.80 and the pivot at $1240. The early moves have once more bolstered the move for a recovery and it will be interesting to see if the bulls can now build a position above the pivot at $1225. The hourly momentum indicators are far more positively configured now for the continued near term recovery.

WTI Oil

The rally has improved the outlook on WTI, but the bulls need to continue the recovery otherwise there will be a few jitters creeping in. It certainly seems that early today the bulls are responding. The market is over a percent higher again today (helped by the announcement by Saudi Arabia and Russia over extension of the OPEC/Non-OPEC production cuts). The momentum indicators are improving and with the moves today, the MACD lines are now posting a bull cross. With the Stochastics and RSI also advancing, this suggests a recovery towards $49.60/$50.20 could be on. Friday’s neutral candle has not scuppered the rally and the bulls are re-engaging today. The initial resistance at $48.20 has been breached and is now supportive whilst the reaction low at $47.35 is initial support of note.

Dow Jones Industrial Average

Despite Thursday’s rally into the close, the bears continue to chip away. Concern is now mounting over the momentum indicators. The Stochastics have formed a bear cross sell signal, whilst the MACD lines are also close to following suit. The last time this was seen on the Dow, in early March, it was the harbinger for six weeks of correction. A close below the reaction low at 20,848 would still complete a small top pattern and imply around 220 ticks of correction towards 20,630. The hourly chart shows momentum configuration is neutral at best, however is increasingly deteriorating. The loss of Thursday’s low at 20,799 would confirm a downturn in the near term outlook. Resistance is initially 20,933 with 20,976 as a lower high.


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