Reaction to China’s retaliation on the US trade tariffs suggests that traders are becoming more immune to the negative effects of this trade spat between the world’s two largest economies. Despite China looking to go tit-for-tat with the US, Commerce Secretary Wilbur Ross believes a compromise will be reached and for all his bluster, Trump is a business man at the end of the day. Surely even he can see that no-one wins in a trade war. It would seem that the market is not positioning for a trade war. A sharp intraday recovery on Wall Street yesterday has changed the complexion of this market, with equities (at least on Wall Street) showing signs of a recovery. Safe haven flows are reversing with the Japanese yen struggling in its crosses and gold sharply reversing. Treasury yields are also ticking higher again, with the US 10 year yield back higher above 2.80%. A full blown trade war would be dollar negative, strongly yen positive and drive gold to 2018 highs. Although there is clearly time for Trump and his tweets to do the damage, these fears are not playing out yet. The reaction on Wall Street last night would suggest that perhaps the market is prepared to look past this issue.
Wall Street closed strongly higher and well off the lows of the session with the S&P 500 +1.2% at 2665, whilst Asian markets have followed this move overnight (Nikkei +1.5%) and European markets are also opening strongly in early moves. In forex markets there is a mild dollar positive bias, although it is interesting to see the Canadian dollar performing well (on the prospect of a positive end to the NAFTA renegotiations). In commodities, the improved sentiment and dollar gains means that gold is another $6 lower, whilst oil is in recovery mode still after a surprise EIA crude inventory drawdown.
The services PMIs around Europe dominate the early part of the session today for traders. The Eurozone final Services PMI at 0900BST is expected to be confirmed at 55.0 (55.0 flash reading, 56.2 last month) and a five month low. The UK Services PMI at 0930BST is always a crucial number for the UK as it accounts for around 80% of the economy and it is expected to slip back to 54.0 (from 54.5 last month). The US Trade Balance will be interesting (given the spat with China) at 1330BST and is expected to worsen slightly to -$56.8bn in February (-$56.6bn in January) which would be the worst month since October 2008. US initial jobless claims are at 1330BST and are expected to be 225,000 (215,000 last week).
Chart of the Day – AUD/JPY
The market has been stuck in a downtrend channel throughout 2018, with the move really finding traction to the downside since early February when market risk appetite really took a dive. Rallies have been taken as a chance to sell during the channel and the latest recovery off 80.50 seems to be another such opportunity. “The trend is your friend… until it ends!” So with the downtrend channel intact, all is fine with the short positioning. However sentiment looks to be changing after two strong bull candles are now breaking the downtrend channel. The seeming supply of sellers around 81.50 are no longer selling, as yesterday’s intraday move above 82.00 shows. Pre-empting resistance at trendlines can be risky, so the sellers will be cautious of the resistance of the mid-March high at 82.57 in the next couple of sessions. This is because the near term recovery in momentum indicators is still progressing. A close above 82.57 would complete a recovery pattern and negate the corrective phase. The market has reached a crossroads and is looking to edge forward towards a recovery, but more confirmation is needed. A breakout above 82.57 opens 83.25/84.50.
An early session rebound could not be sustained yesterday and the market closed the session with a very luke-warm positive close that does little to instil confidence that the bulls will be able to sustain the primary uptrend. The 12 month trendline comes in at $1.2245 today and remains under pressure as the corrective drift of the past week and a half continues to post lower daily highs. Add in the fact that the momentum indicators are all slipping gradually lower into a more corrective configuration and the bulls will be getting worried. Essentially it seems that unless a strong bout of buying pressure resumes soon, the medium term sideways range that has dominated EUR/USD since mid-January, will neutralise the longer term outlook. The 400 pip range between $1.2155/$1.2555 is fast becoming the dominant chart feature. Support of the March low at $1.2235 is now key within this. The hourly chart shows a run of lower highs, with $1.2315 initially and then $1.2334/45 under the old $1.2360 near term pivot. Hourly momentum is also negatively configured and suggests that near term rallies are being sold into. Yesterday’s low at $1.2255 is initially supportive. A breach of $1.2235 opens $1.2155.
It has been like trudging through uphill mud for the bulls in the past few days, posting a series of small positive candles along the line of a five week uptrend. A run such as this never looks convincing and the bulls will rightfully be wary as the momentum indicators are certainly not driving higher with any gusto. Today’s early move lower is a warning, especially with the same five week uptrend on the hourly chart having been breached yesterday. The failure to clear resistance around $1.4100 is also a concern and means that the market remains stuck with little real direction between $1.4000/$1.4100. There is little sign of any bullish breakout either. The $1.4000 level remains key support as a psychological but also near term pivot. It also protects a bigger, five month uptrend (currently at $1.3945). A decisive break above $1.4100 could begin to develop traction for the bulls but for now there is a muted consolidation within the uptrend.
As market sentiment is beginning to look more on the bright side, as such the yen is becoming less favourable. Subsequently we see Dollar/Yen pulling higher. The intraday rebound for a positive close yesterday was a statement of intent but the bulls need to now break some overhead resistance between 107.00/107.90. The first hurdle of a 5 week downtrend channel being broken has been achieved, but the barrier of 107.00 needs to be broken too. A move above 107.30 would be the first breach of a key lower high too and also once more improve the outlook. Momentum indicators are still improving with the Stochastics (the most reactive indicator I use) now into strong bull territory. The RSI is only just above 50, but clearly improving, whilst the MACD lines are rising but still in negative medium term configuration. For now this is a rally within the medium to longer term bear market, but the bulls are at least fighting back now. It would really need a push above 107.90 for something more decisive to be taking place.
The bulls were sitting pretty just under 24 hours ago as the market was breaking back above $1341 but an intraday sell-off has left the chart with a deteriorating outlook within the medium term sideways range once more. Yesterday’s candlestick pattern was almost as close to a “gravestone doji” as you can get on a continuous 24 hour traded market, and this is a candle that does not bode well near term. The market has continued the intraday decline from yesterday and slipped further today, back into the $1320s and now the reaction low of $1321 is back in view. Furthermore, resistance has been left now at $1348 from yesterday’s high as momentum indicators begin to roll over again. Taking a step back though there is very little direction on gold and sentiment is shifting constantly on almost a daily basis. For now the market is slipping back again and below $1321 re-opens the lows between $1300/$1310. However, in newsflow driven markets, things can change quickly.
The market turned sharply around during yesterday’s session to leave support at the key uptrend that dates back to the August low of $45.60. Fears of a trade war seem to be receding, but also an unexpected EIA crude oil drawdown pulled the bulls back in to leave support at $62.05 (almost bang on the support of the trendline). The candlestick formation was not quick a bull hammer, but the intent is there from the bulls and holding the uptrend is a feather in the cap. Momentum remains positively configured on a medium term basis and the Stochastics are already showing signs of turning higher again (a function of a sharp intraday rebound yesterday). The hourly chart shows that the resistance between $63.75/$64.25 is now being tested again and if this can be breached then the bulls will be back in control. This will be the key test in the coming day or so. Above $64.25 opens $65.40.
Dow Jones Industrial Average
The Dow recovered quickly from the initial big gap lower yesterday as the bulls fought back to post an impressive gain on the day. Seemingly the market is taking a view that a trade war is not the most likely outcome. This move has now broken a two week downtrend and is threatening the first real lower high that has been posted in a series of lower highs over recent weeks. The hourly chart shows the market is now into the resistance band 24,218/24,314 and is the first real barrier that the bulls need to negotiate. Medium term momentum is still correctively configured, but the moves of the past couple of days are helping to drive the near term recovery momentum. Daily Stochastics and RSI are advancing, whilst the MACD lines are now threatening to cross higher. Could there be a change of sentiment in the technical? The hourly chart shows a series of lower highs in place whilst every time the hourly RSI hits 60 or the hourly MACD lines unwind to neutral, the bulls have struggled. So today’s session could be key for the improvement of the near term outlook as this could be broken.
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