Sentiment looks cautious with politics a key driver

Market Overview

Market sentiment is looking cautious as politics remains a key driver. Traders continue to read into the implications of the UK election result. The knives may be sharpening in the Conservative Party for the flawed (perhaps fatally so) Prime Minister Theresa May, but as yet there has been no attempt to oust her. Sterling is a difficult play now moving forward as there are so many varying factors such as the stability of Mrs May’s government and the impact on Brexit. Even if sterling settles for now, the coming weeks could easily see further fallouts and negative moves, with the downside risks still high. In France it looks like Macron’s En March is set to see a landslide victory with 28% of the vote (just for reference the Conservatives in the UK won 42% of the vote, such is the fractured nature of the vote in France). The euro has stabilised on the back of the French election after a wobbly few days. However traders will quickly turn their attention to Wednesday’s Federal Reserve meeting. With US data struggling and Treasury yields showing the reflation trade on its knees, how will the Fed steer for further tightening? The US dollar will be a key mover.

Change tracks

Wall Street closed mixed on Friday, with the Dow up, S&P 500 around flat (-0.1% at 2432) and NASDAQ down, Asian markets have been weaker today (Nikkei -0.5%). European markets are all lower in early moves with the FTSE 100 under pressure, whilst the French CAC 40 is outperforming. In forex the dollar is marginally lower across the major pairs. Gold has found a degree of support after three straight days of solid losses, whilst oil is marginally higher.

There is a very light economic calendar today.

 

Chart of the Day – DAX Xetra

Is the DAX now set up for a test of the highs again? The DAX has been ranging now for the past six weeks between 12,490/12,879 and the bulls will be getting increasingly confident of a breakout. This comes as the latest correction within the range has formed support at 12,640 before posting a strong bull candle on Friday. Momentum indicators appear to be preparing for a the next bullish breakout with the RSI holding firm in the mid-50s on the RSI, whilst the MACD lines are set to post a bull cross. The hourly chart shows a sequence of higher lows over the past couple of weeks forming an uptrend whilst the hourly momentum indicators are positively configured to show that corrections remain a chance to buy. Initial support is at 12,736 and then last week’s low at 12,640. The all-time high is 12,879 and a closing breakout could be a completed range breakout which would imply 390 ticks higher over the coming weeks.

EUR/USD

The euro has slipped away in recent sessions however the market remains a buy into weakness. A third consecutive negative candle ended last week taking the pair below the initial support at $1.1200, a move that implied further correction of around 85 pips on a completed near term top. The momentum indicators are tracking lower in line with the drop away in the price. However the market has simply unwound to the rising 21 day moving average (currently $1.1190) which has often been a basis of support. The early positive reaction on Monday morning will question whether the support has now come in at $1.1165 from Friday’s low. The hourly chart shows a corrective slip that is more of a drift lower than any significant selling pressure. The hourly chart shows $1.1160 has been a consistent pivot in the past three weeks and again has been supportive. The longer this support remains intact the bulls will start to eye the next move higher again. Holding above $1.1200 again would improve te outlook with resistance at $1.1237 and $1.1265 before the key high at $1.1285.

GBP/USD

Since Theresa May called the election, $1.2775 has been something of a watershed. Initially the long term breakout old resistance had become supportive but since Friday, this pivot has become resistance. Cable turned corrective with the strong bearish candlestick on Friday and this now remains the key legacy of the UK General Election. Momentum indicators are now corrective and pressure is turning to the downside. This comes with the MACD lines bear kiss and Stochastics crossing lower to suggest that near term rallies are a chance to sell. The immediate reaction higher this morning means the pivot at $1.2775 is again the near term resistance to watch. However although the market has stabilised a touch today, the basis of the resistance remains in play, and sterling is likely to struggle for sustainable upside traction now. The market needs a close above $1.2775 to change the near term tone again. The hourly chart shows momentum indicators unwinding back to use this rally as a chance to sell, with resistance $1.2775/$1.2800. Initial support is now at $1.2700 before Friday’s spike low at $1.2632.

USD/JPY

The market has been trending lower since the second week of May and once more on Friday this downtrend was used as a basis of resistance as the latest near term rally begins to run out of steam again. Friday’s candle was positive but lost momentum into the close, and today’s early slip again questions the longevity of the rebound. Momentum indicators have been correctively configured for several weeks now and the RSI remains stuck under 50, with the Stochastics bumping along in bear configuration. The hourly chart shows a push through 110.72 resistance but the failure to capitalise on this move is a concern for the bulls. Trading below the pivot at 111.60 ultimately keeps the bears in control and rallies remain a chance to sell. Friday’s high at 110.80 is adding to overhead resistance now. Expect further pressure back on 109.35 the 50% Fibonacci retracement in due course.

Gold

The gold rally has lost its way as three strong bearish candles have been posted to break the uptrend that has been pulling the market higher since the second week in May. The move has significantly deteriorated the momentum indicators which are now beginning to look under pressure. However whilst the market is trading above the main medium term pivot at $1261, the bulls will be in control. The market is also trading above all the rising moving averages, and whilst this corrective slip is a concern, there is nothing as yet that has decisively broken the bull control. The concern will be that the recent corrective move needs to be stopped, and on the hourly chart, the bulls look to be under big pressure. The hourly chart shows that around $1271 the market has formed a pivot in recent days, that is currently acting as resistance. The next resistance is $1280.50/$1282.50. Near term rallies are being sold into but the market needs a decisive close below $1261 to significantly change the outlook.

WTI Oil

The risk rally appears to have missed the oil market as the buyers once more struggled to gain any traction in the market. Having broken sharply below $47.00 on the EIA inventory build last week there has been very little positive reaction despite the general market sentiment being more positive in the past couple of days. WTI has posted two small indecisive candles that may show near term support holding at $45.20 but little buying of any significance.  This comes as technical momentum indicators remain deeply negatively configured but also with further downside potential. Rallies remain a chance to sell. The hourly chart shows initial resistance from the past couple of sessions at $46.18 but the overhead supply really kicks in between $46.75/$47.00. Unwinding moves on the hourly RSI towards 60 have tended to be seen as a chance to sell. Key resistance is now at $48.40

Dow Jones Industrial Average

The Comey testimony seems to have released the shackles from the bulls once more as a risk rally has burst the Dow through to a new all-time high. Momentum indicators remain strongly configured and the market is now building a run of higher lows with intraday corrections being bought into. With the RSI still just in the mid-60s there is further upside potential, as the February/March rally ran into the high 70s. The old highs of 21,070/21,118  are now growing as a basis of support now with the market building from the 21,118 reaction low. Resistance is initially with Friday’s all-time high of 21,305 with corrections a chance to buy.

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