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Q2 trading sentiment begins with the glass half full


Market Overview

The second quarter of the year seems to be getting off with trading sentiment looking at the glass half full. There is a slight bullish bias on equities, safe havens are underperforming, however sentiment is mixed on forex with both the yen and the Aussie underperforming. Aside from President Trump suggesting that the US would be willing to act alone against the threat of North Korea, there is little significant newsflow that is setting up market sentiment. Despite this somewhat worrying prospect, safe haven plays are actually underperforming, with the yen and gold lower, whilst Treasury yields are marginally higher. However the dollar is not managing to perform especially strongly either, with the positive performance of the euro a case in point. After closing lower on the final session of Q1 (perhaps a bit of book squaring), equity markets are looking a touch more positive today. The manufacturing PMIs from the Eurozone, UK and US will be in focus, whilst Japan’s Tankan survey was mildly positive for Asian equities. Although Wall Street closed mildly lower on  Friday the gains in Asia today seem to be filtering through into Europe, however the FTSE 100 remains an underperformer with the sterling strength.

glass half full

On the first trading day of the month, traders will always be on the lookout for the key Manufacturing PMIs from around the world. Eurozone final Manufacturing PMI is due at 0900BST and is expected to be mildly revised higher to 56.3 (from 56.2). The UK Manufacturing PMI is at 0930BST and is expected to improve to 55.1 (from last month’s 54.6). The US ISM Manufacturing is at 1500BST and is expected to drop slightly but remain strong at 57.2 (down from 57.7 last month).

 

Chart of the Day – FTSE 100

The bulls will be hoping that the market will continue to be dragged higher by the force of other markets, because the FTSE 100 is not looking as technically positive as other equity markets such as the DAX or S&P 500. With Friday’s 47 tick move to the downside and a market that opened at the high of the day and closed at the low, the pressure seems to be growing to the downside. Although market has ticked marginally higher at the open today, if the bears start to gain momentum, there is now a distinct possibility of a head and shoulders top formation. The pattern would complete on a move below the recent reaction low at 7255 and would imply around 190 ticks of additional downside, if the pattern was confirmed.  The strong bear candle from Friday has now left resistance in place at 7385 which would then become a key lower high below the all-time high at 7447. The daily RSI could become an early warning signal, as a decline below 43 would be a near four month low, whilst the MACD lines are also declining back towards neutral and are also threatening a similar signal. The hourly chart shows a couple of near term supports that should be watched, at 7314 and 7290. Furthermore, if a rally peters out below 7370 it would add to the overhead supply building up. Above 7385 improves the outlook.

EUR/USD

The sequence of bear candles continues to build and the corrective configuration now on the technicals has changed the outlook. Four strong bear candles in a row has pulled the market below the old pivot and support at $1.0710 which on Friday became a basis of resistance again. The daily momentum is on a deteriorating trend with the MACD lines falling and Stochastics also in decline. The near term strategy has now become one to sell into strength. The hourly chart shows negative configuration on momentum and the resistance building at $1.0702. The slight rebound in the Asian session will be seen as a chance to sell for a retest of Friday’s low at $1.0650, before a likely move back to test $1.0600. Above the pivot at $1.0710 the near term resistance is $1.0740/$1.0775.

GBP/USD

Sterling has continued to remain strong in the wake of the UK triggering Article 50 last Wednesday. The strong bull candle on Friday reflects this improvement and is strengthening the rally for what looks now likely to be a retest of the $1.2615 March high. Daily momentum retain their bullish configuration with the RSI again up towards 60, along with MACD and Stochastics lines pulling higher. Cable is trading back above its moving averages which are all converging and could be set to turn up in bullish sequence. The hourly chart shows the market is consolidating Friday’s break above $1.2520. Also, having stabilised at the $1.2380 support, the market has left Friday’s low at $1.2430 as a key higher low. The  configuration of the hourly momentum has a bullish bias now and near term intraday corrections are a chance to buy between $1.2480/$1.2520.

USD/JPY

The prospects of the bull rally are being tested and that could mean that today’s session becomes important for the recovery phase. The daily chart shows a marginally bearish candle posted on Friday has pulled Dollar/Yen back below the key resistance at 111.60 in a move that questions the ability for the bulls to sustain a recovery. The early “doji” candlestick through the Asian session also reflects an uncertainty that the European traders will be facing as they take over now. The daily momentum indicators reflect a stuttering recovery and this would be part of it. The hourly chart shows how the market has retreated back towards the rising hourly moving averages just above 111.00 and is now looking to form support this morning above 111.10 and this will be an early marker to build from. Another higher low above 110.70 would help to bolster the support for the recovery. However this would also need a move back above 111.60 today. There is resistance from Friday’s high at 112.20 that will need to be overcome.

Gold

With a positive reaction on Friday that has maintained the support around $1240, there are several question marks hanging over the gold price now. The run over the past week saw gold give up over $20 high to low but the late rebound means that the price has not topped out yet. The momentum indicators have lost their upside impetus but this could still simply be a phase of consolidation. The reaction of today’s move could be important now. There has been a sequence of bull and then bear candles in the past week that has formed a run of lower highs. If this continues then today’s move will again be lower and this would put pressure back on $1240. The hourly chart shows momentum again losing its way into the rally and MACD lines and especially Stochastics are pulling lower. This could mean that another lower high under $1254.70. A decisive move below $1240 would open the correction back towards $1220, with initial support at $1235.50 and $1226.

WTI Oil

After such a strong recovery and completed base pattern the bulls could have been forgiven for a day of consolidation on Friday. However, what looked like a neutral candle formation, pushed higher to close up on the day once more and sustain the move above $50. Improving technical indicators subsequently remain intact and the bulls can look towards using intraday corrections as a chance to buy. The neckline of the base pattern remains at $49.60 with the hourly chart showing a series of higher lows and positive momentum indicators. The moves on oil in the early days this week will help to determine whether the bulls can seriously sustain the move back above $50, but the early signs are positive. The base pattern implies $2.60 of recovery from the $49.60 neckline and a target of $52.20.

Dow Jones Industrial Average

Can the Dow complete the base pattern? With other equity markets continuing to show bullish signals (most notably the S&P 500 and DAX) surely it is only a matter of time before the outlook on the Dow turns positive again. However, a day of consolidation on Friday seems to have held up the bulls, with the resistance band 20,757/20,777 still intact. So it is, as you were then with momentum indicators drifting a touch, but still open to the prospect of this turning into a bull recovery. The downtrend of the last few weeks today comes in at 20,810 and this also remains an overhead barrier to gains. The hourly chart shows that as long as the support at 20,625 remains intact then the prospective base pattern remains in play.


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