Last updated: May 3rd, 2017 at 09:58 pm
The recovery in the oil price has helped to drive an improvement in sentiment across financial markets. With reports that Saudi Arabia and other key OPEC countries set to meet with Russia (another major oil supplier) to discuss the possibility of production cuts, the oil price has continued to recover. This move has driven a sharp reversal of the safe haven flows that have seen such strong moves in gold, the yen and Treasuries in recent weeks. These trades are sharply unwinding and equities are feeling the benefit. The longer the oil price rallies, the longer the bounce in market sentiment will be. The move has also been assisted by the once more supportive/accommodative comments from ECB President Mario Draghi. Having already mentioned in the last ECB meeting that further easing was on the table, Draghi was never going to be anything other than that. The big question is whether he can deliver on the big talk again (my mind harks back to December’s disappointment).
The US was closed for Presidents’ Day yesterday but the Asian markets have been boosted by the improved sentiment, although perhaps somewhat surprisingly, the Nikkei was only up 0.2% despite the yen weakness recently. European markets have opened higher. In fore markets there has become a bit of a mixed outlook coming into the European session. Earlier dollar strength has ebbed away and a far less certain picture is developing. The continued gain in oil is helping the Canadian Loonie stronger, but interestingly the Kiwi dollar is the underperformer today after New Zealand retail sales disappointed last night.
Traders will be looking out for UK inflation with CPI announced at 0930GMT with an expectation of a slight improvement to +0.3% (up from +0.2%), although the core data is expected to dip to +1.3% (from +1.4%). German ZEW Economic Sentiment is also at 1000GMT with an expectation of a slide back to just +0.1 (from 10.2). The NABH Housing Market Index at 1500GMT is the key US data and is expected to stay at 60.
The index has bounced once more to engage what I see to be a bear market rally and this is likely to once again be seen as a chance to sell in the coming days. The downtrend channel that has been well formed over the past four months is dragging the medium to longer term outlook lower with rallies failing at ever lower levels. The current rebound has come amidst two strong bull candles and turns the outlook positive for the time being. The daily Stochastics have crossed higher to give a confirmed buy signal now. However the RSI continually fails between 55/60 (latest close at 48 means that there is further upside potential in this rally. The downtrend channel is falling currently around 6045 with the falling 55 day moving average a decent gauge of resistance at around 6000. The rally above the resistance of the old key floor at 5768 should give the bulls some confidence for the near term, and a test of the next resistance at 5945 could be seen. However, despite the rally continuing today, I am still medium to long term bearish and these rallies continue to be excellent chances to sell. Only a move above the reaction high at 6115 would change this outlook.
The euro was already on the way lower yesterday, however the comments from Mario Draghi in the afternoon which suggested that the ECB is ready to act with further monetary easing, helped to pull EUR/USD even lower. The correction is now back towards what I believe to be an important medium term support level. The breakout from the pivot band $1.1050/$1.1100 was a key development in driving a stronger euro and I see this as an area that the bulls will see as key support. The bulls will though be fighting against daily momentum indicators which as becoming corrective now, with the Stochastics having given a confirmed sell signal. This puts the pressure on to the downside. After two consecutive strong bear candles on the daily chart the overnight support has been formed at $1.1125 with little real movement in Asian trading. The interesting reaction could be when the US traders return to their desks after their Presidents’ Day holiday. The intraday hourly chart does reflect a slightly more corrective chart, but the key support is $1.1085 which needs to be held. There is minor resistance around $1.1215 and further at $1.1260.
The consolidation continues but there is a slight shift in that there is now a marginal bearish outlook to the chart. A corrective candle yesterday and slight weakness in Asian trading has put the sterling bulls on the defensive once more and the key support at $1.4350 is once more under pressure. The daily momentum indicators have turned more corrective too with the Stochastics turning lower and also the RSI back under 50. I said yesterday that any move back into the range $1.4350/$1.4450 would mean that I would be turning more neutral and this is the case. The $1.4450 level has once more acted as a pivot band with the break back below it subsequently meaning that it has come in as a basis of resistance and this becomes the range high near term. The momentum indicators on the hourly chart are still fairly rangebound and this should still suggest no significant appetite to breach the $1.4350 level yet, but if the hourly RSI starts to move below 30 this could be a sign of impending breakdown. A move below $1.4350 opens $1.4145.
With the recovery in risk appetite (driven once more by the oil price), the move away from safe haven plays has meant that the yen has been sold off again, so the retracement is certainly underway. It has been progressing nicely, completing a second consecutive strong bull candle. There is also now a position in place for a recovery in the daily momentum indicators, with the Stochastics ready to give a confirmed buy signal today (all things remaining equal) and the RSI having moved above 30 again. The move above the 23.6% Fibonacci retracement of the 121.68/110.98 sell-off means that the 38.2% Fib level at 115.07 is now the next target area. However, the hourly chart is just posing a few more questions for the bulls. There has been a breakthrough of resistance at 114.20 but this is a level that now needs to hold as you would like old resistance to become new support, as has happened with 113.15. The hourly momentum has also become just a touch sluggish arguably as the next price resistance band 115.00/115.50 has approached. The support around 114.20 now needs to hold otherwise the validity and strength of the recovery will begin to be questioned.
The retracement is on, but the question is, how far will it travel. A decisive breach of the 23.6% Fibonacci retracement of $1071/$1261 has already been seen, but it is interesting to see the 38.2% Fibonacci level at $1188 already being considered as a near term stopping point as the overnight low has bounced from $1190.40. This could simply be a minor bounce as if the oil price continues to rally hard then the inference is that risk appetite will improve and gold will suffer today. The technical indicators show an RSI sell signal now, with the Stochastics also crossing lower (not quite confirmed as a sell signal yet). We should though consider the first band of support which is between $1181/$1200 as being a consolidation area too, so there is potential demand here for the buyers. The support at $1181 therefore is key near to medium term as a breakdown would continue the correction and also then open the 50% Fib as a retracement target at $1166. As with another safe haven retracement, the yen, the current correction on gold is still underway and this looks set to continue. There is resistance at $1212.70 and then up at $1231.
With the US off on Presidents’ Day yesterday the market was closed, but the overnight move today has just continued the strong run higher (aided certainly by the suggestion of an impending meeting between OPEC countries and Russia to discuss oil production cuts. We will though get more of an idea whether the US traders will come back from the public holiday with a hangover or not. The strong move in the past couple of sessions has flipped the outlook once more and a confirmed close today (surely this will be seen…) back above the resistance band $29.25/$30 is important as this was a key breakdown level last week. However until the 3 and a half month downtrend has been broken, currently coming in around $32, the rallies will be seen as a chance to sell. The RSI unwinding towards 50 is also consistently seen as a chance to sell. A failure to hold back above the old neckline at $29.25 would quickly drive concern of a return towards the lows again and the support at $29.05/$29.25.
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