Last updated: May 3rd, 2017 at 09:58 pm
The rather concerning China trade data continues to have a legacy in this market as the safe haven trades have found some demand once more. The big question is whether it is enough to de-rail the risk recovery. It is too early to know, but there are still some key markets that need to be watched. The oil price which is still a big driver of market sentiment (with a big positive correlation to equity markets) dropped by its biggest margin since the rally began 4 weeks ago, and has dragged equities with it. Oil has formed some support in the Asian session today, but once again traders will be looking for signals to drive sentiment. Wall Street closed lower last night by 1.1% and with the safe haven yen strengthening the Nikkei has also weakened by 0.8% today. European markets are cautiously trading around the flat line in early moves today as a higher oil price helps to generate support, although positioning ahead of the crucial ECB meeting tomorrow could also be a factor.
There is also a sense of mild safe haven positioning in the forex markets, with the yen remaining the outperformer, whilst every other major is weaker against the US dollar. An interesting feature of this move has been that the gold price corrected yesterday despite the apparent demand for safe havens and is also lower again today. The support for the oil price means that both WTI and Brent Crude are around 0.5% higher.
In the European session the UK Industrial Production is the main focus with the expectation for +0.2% coming after the data unexpectedly fell negative last month at -0.3%. Then in the afternoon we get the monetary policy announcements of two central banks, although neither are expected to make any sort of move to cut rates. The Bank of Canada at 1500GMT is expected to maintain rates at +0.50%, whilst the Reserve Bank of New Zealand is expected to hold fire at +2.50% at 2000GMT. Watch out for any jawboning though following recent strength in the respective currencies, with a lack of inflation also potentially there to be cited as a reason to remain accommodative. There is also the EIA oil inventories report at 1530GMT with an expectation of a further build in crude stocks by 4.0m barrels.
In front of an ECB meeting where the Governing Council is expected to further ease monetary policy you would think that Euro/Sterling would be pulling lower. Yesterday’s positive candle may come as a bit of a surprise but technically the pair could be set to top out. The breakdown of the uptrend channel has already sent the alarm bells ringing for the euro bulls and the support that has formed around £0.7690 over the past few weeks is preventing a completion of a head and shoulders top pattern. A closing breach of £0.7690 would subsequently imply a downside target of £0.7450. The deterioration in the momentum indicators certainly suggests that this looks to be a topping phase for the euro and although the pattern has not been completed the pressure is mounting. The 21 day moving average (today at £0.7782) which had previously been supportive during the trend channel run higher is now turning into a basis of resistance and has also turned lower. The RSI recently went below 50 for the first time since the trend channel began back in early December, whilst the MACD lines have also rolled over and look corrective. The intraday hourly chart shows a mixed near term outlook with the retracement of yesterday’s gains leaving resistance at £0.7792, as a move above the old pivot at £0.7775 could not be sustained. A move above initial resistance at £0.7815 would improve the outlook again.
The euro rally seems to have rolled over in front of the crucial ECB meeting tomorrow. Once again the failure has happened around the old pivot level at $1.1050 and it would seem as though the outlook will be neutral moving into the ECB. The last two candles have been all rather neutral with yesterday’s small doji being followed by initial weakness today. The move means that momentum indicators are all but neutral, with the Stochastics and RSI rolling over around 50 and the MACD lines flattening around zero. The hourly chart shows a break back below $1.1000 which has been a minor pivot in the past couple of days, with support based around $1.0950 (or $1.0938 to the pip). I would expect the euro to remain rather subdued in the next 24 hours with such a high volatility event looming.
Is this a consolidation, or is it the beginning of the next leg lower? I have been looking out for rallies being a chance to sell and the way that Cable is beginning to roll over around the resistance of the 3 month downtrend looks to be that opportunity. The momentum indicators are all set up for this move, with the RSI rolling over around 50 once more, the Stochastics losing impetus and the MACD lines showing little sign of any sustainable recovery. The intraday hourly chart also reflects this loss of momentum and I am now looking at the support from Monday’s low at $1.4132 to be the trigger. This is the latest higher low within the recovery and if this support is broken then it would confirm the bulls had lost control and a new trend formation was beginning. Underneath the reaction high at $1.4282 there is a minor lower high at $1.4240 which will now take on added importance as if it remains intact then the profit-takers will begin to be concerned. Subsequent support below $1.4132 comes in at $1.4105 and then more importantly at $1.4045.
There are several aspects of yesterday’s trading that are rather concerning for the bulls now. The solid bearish candle being the most clear, with a decisive move away from the 23.6% Fibonacci retracement at 113.50 which has been centric to trading in the past 7 sessions. Furthermore, the RSI recovery has rolled over under 50, and the Stochastics have given a near term sell signal. The intraday hourly chart now shows that the pivot level at 113.15 which had been supportive in the past week has now turned into resistance with rallies now seen as a chance to sell for pressure towards the next support at 112.15. A successful breach of 112.15 would then re-open the key lows around 111.00. Trading below 113.15 would now maintain a negative outlook for Dollar/Yen.
Gold is seeing another test of its bull credentials today as a retreat from yesterday’s high around $1277 has completed a bearish one day candle (closing towards the low of the day) and with losses that have continued into the early Asian session today. I have redrawn my uptrend to find a trend that is now into its sixth week and today comes in at $1246. This is also a trend that is flanked well by the rising 21 day moving average (at $1233) which has been tracking the bull run on gold throughout 2016. I remain concerned by the bearish divergence on the momentum indicators and I do believe that eventually these will have a part to play in the end of the bull run. Watch for the daily RSI falling below 60 to be a signal. The hourly chart shows a retreat bac to the support band $1248/$1252 but the hourly momentum is showing signs of strain now. I tis also interesting how the recent February high at $1260.60 had been acting as support in the past few days and has now been breached and this could now become a near term basis of resistance. Below $1248 opens $1237.
Will the China trade data de-rail the oil price rally? Well the uptrend is certainly now being questioned as a sharp bear candle (the strongest bear candle in almost 3 weeks) has dragged the oil price lower to leave resistance at $38.40. This is also interestingly bang on the resistance of the 2016 high on WTI. The 4 week uptrend comes in today around $36.00, but it could be that WTI is engaged in a pullback to the neckline support of the double bottom reversal pattern. This means that the key support comes in at $34.80. The intraday hourly chart shows that the move could simply be another unwinding move back towards the support of the rising 89 hour moving average (currently around $36.19) which has been the basis of support since the end of February. Also watch Monday’s low at $36.10 as a near term support also, as a breach would open the reaction lows at $34.20. Hourly momentum has unwound and seems to now have renewed the upside potential, which could help to settle the bulls again.
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