After the recent shake up to risk appetite, financial markets are beginning to look more steady as the new week begins. Elevated fears over Italian political risk contagion have subsided, a run into safety seems to have been curtailed, at least for now. The sharp drop in Treasury yields is reversing once more, with a rebound on the US 10 year Treasury yield from last week’s spike low of 2.76% now over 15 basis points higher, over 2.91%. Other safe haven plays, such as the Japanese yen and gold are also on the retreat, whilst equity risk appetite is also picking up once more. The VIX volatility dropped back again on Friday (helped by the solidly positive Non-farm Payrolls report) and equity markets are looking positive once more. However, the near term market outlook remains clouded as the sigh of relief over Italian politics is tempered by uncertainty over relations between the US and its major trading partners. Tensions between US and China have yet to be resolved, whilst the G7 meeting over the weekend talked about the prospect of an imminent trade war as the US is ready to impose the tariffs on allies such as Canada and the EU. For now, the markets are managing to look past the trade tensions (too complacent perhaps, especially given the uncertainties over US and North Korea too), but it will remain a factor that could blow up once more for traders in the coming days.
Wall Street closed strongly higher on Friday in the wake of the payrolls report, with the S&P 500 +1.1% at 2734, whilst the Asian markets have also responded well today (Nikkei +1.4%). European indices are also trading decisively higher in early moves. In forex, it is improved risk appetite that is dominating the outlook across the majors, with the yen the biggest underperformer, whilst the dollar is also broadly weaker. With Treasury yields pushing back higher it will be interesting to see how long this relative underperformance of the dollar continues. In commodities, the safe haven gold is weaker by just over $1 whilst oil is once more struggling to gain ground with supply issues continuing to bite as US rig count increased by another two rigs to 861 last week.
There is a limited economic calendar for traders to factor in today. The UK Construction PMI at 0930BST is expected to weaken to 52.0 (52.5 last month). Construction is only around 7% of the UK economy whilst the data has seen some fairly wide misses both higher and lower in recent months, making it a difficult one to predict. The US Factory Orders are at 1500BST which are expected to fall by -0.5% on the month (+1.6% MoM last month).
Chart of the Day – AUD/JPY
Risk appetite is bouncing back and this is reflected in the rebound on Aussie/Yen. A bullish engulfing candlestick on Wednesday ended a run of six consecutive bear candles and turned the tide, but it was Friday’s move higher which has really pointed to a return of the bulls. The positive bull candle took the market once more back above the medium term mid-range pivot around 82.60. This move has coincide with a number of other technical improvements, with the RSI ticking back above 50 whilst the Stochastics have also turned higher. This morning’s early gains have also now taken the market above a minor reaction high at 83.15 which is another confirmation of the bulls returning. A close above here would suggest a continued move higher and again re-open the multi-month range highs around 84.50. The hourly chart shows the importance of the support at 82.00 now as the near term outlook improvement continues to build. Initial breakout support is at 82.60/82.95.
The market rebounded from $1.1505 last week to recover back to test the first confluence of resistance. The long term Fibonacci retracements have played out as medium term turning points in recent month and the 38.2% Fib level at $1.1735 will be seen as a gauge. There is also the overhead supply of $1.1715, the old November/December lows to consider too. Last week’s rebound has stalled around these resistance levels. However the near term momentum indicators are improving, with the MACD lines crossing higher, whilst RSI and Stochastics are also rising. If the market can close above $1.1735 then the market will be open to test $1.1820 which is the next key resistance in front of $1.2000. A positive open today means that Friday’s low at $1.1615 which would also then become a higher low for a recovery. The hourly chart shows a more positive configuration setting up, but the resistance overhead is significant still.
After over 6 weeks of consistent negative pressure, Cable has embarked on a decent looking rebound. The end of last week saw three consecutive positive candles posted, something that has not been seen throughout the decline. With a further positive open today the momentum for a recovery is building now. The RSI is finding traction above 30, whilst the MACD and Stochastics lines are gaining ground following positive crosses. There is an old floor of support that is now resistance at $1.3450 that now needs to be breached as the first real test of the recovery, however the move this morning has already left a higher low at $1.3250 above last week’s increasingly important support at $1.3203. The hourly chart shows that near term corrections are now being bought into, meaning that support at $1.3300/$1.3335 will be seen as an important support zone today on any unwinding move.
The medium term importance of a correction that has found support at the key breakout around 108.00 is significant. With a strong bull candle on Friday looking to reinstate bull control, the correction of the past couple of weeks looks to have been a strong chance to buy. Medium term configuration on momentum indicators are all positively configure to suggest this is a good buying opportunity now, with the RSI picking up above 40, Stochastics turning up around 20 and MACD lines settling above neutral. The pivot around 110.00 is again a key level to breach but the market will now look to use another pivot around 109.00 as a basis of support now. The hourly chart shows 109.45 is initial support today. A close above 110.00 would re-open the key resistance at 111.50 once more.
Trading throughout last week showed that the long term pivot band $1300/$1310 remains a key consideration for traders, currently acting as a key ceiling for the rally. Momentum indicators also retain their corrective configuration which suggest that near term rallies remain a chance to sell. Friday’s strong bear candle ended a run of mixed/consolidation candles and puts the sellers into the driving seat on Monday morning. The move has left resistance of the last two weeks at $1306.50/$1307.80 and the market is trading back decisively below all the moving averages which are in decline once more. Furthermore, it shows that a downtrend formation since the April high also remains intact. A close back below $1290 would re-open the low at $1281.80. There is a near term sell zone now between $1294/$1300.
With WTI having corrected almost 10% over the past eight completed sessions, the market has retreated back to put serious pressure on the key nine month uptrend. Having closed marginally below the uptrend on Friday, a second closing breach today (under $66.30) would really question the longevity of the bull control. Subsequently, the technical importance of the moves in the next session or so is crucial for the medium term outlook. Since February all of the key corrections have been supported by the rising 89 day moving average (currently $65.44). The RSI has also continually found lows around 35, however the speed of this correction has been aggressive (look at the deterioration in the MACD and Stochastics lines). Also the near term outlook is very concerning for the bulls, with Friday’s strong bear candle a close below the key medium term pivot around $65/$66. The move also makes the reaction high at $68.65 a key lower high. A move below the initial support at $65.50 opens the next key reaction low from April at $61.80 but until the 89 day moving average is decisively broken the outlook is not decisively negative.
Dow Jones Industrial Average
The bulls fought back again in the wake of Friday’s payrolls and come into the new week in a good position to push back higher again. The past eight sessions have been trending lower but a move back above 24,715 would imply the bulls turning a corner one more. The momentum indicators have been mixed with RSI and MACD lines still difficult to read much from, but the sensitive Stochastics have just ticked higher once more. Furthermore, it would leave a higher low at 24,352 above the late May reaction low at 24,248. The tight grouping and generally neutral direction of moving averages reflects the mixed medium term outlook with traders still struggling for decisive direction.
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