Has the market gone too far too fast in the wake of the Fed? Well when it comes to equities, that is a possibility. The initial euphoria (I’m still not yet sure exactly why, when the bond markets had priced the Fed very well) on equities is now threatening to reverse. Sentiment has certainly taken a hit as the focus has quickly returned to weakness in commodities, with the move coming as oil prices threaten to move back to multi-year lows. Wall Street closed sharply lower with the S&P 500 down 1.5% and leaves European markets firmly on the back foot at the open. Markets in Asian have also been weaker, whilst the measures laid out in the Bank of Japan meeting have left the market a little disappointed. The BoJ has not changed its monetary policy but has initiated a series of programs which include the purchase Exchange Traded Funds at an annual rate of 300 billion yen (c. $2.5bn) which will increase the existing program of EFT purchases to around 3 trillion yen. The Nikkei initially reacted well, but the selling pressure soon took over and the market has closed 1.9% lower.
In forex trading, the dollar is under some selling pressure today as the gains post the Fed meeting are beginning to retrace. The greenback is weaker against all the major pairs. Gold is looking to rebound today too, however the oil price remains under pressure.
There is not a great deal for traders to look at on the economic data front, with Canadian CPI inflation at 1330GMT expected to pick up to 1.5% (from 1.0%), but the most import piece will probably be the Kansas City Fed manufacturing data at 1600GMT (last month was +3.0) which needs to hold up in positive territory in the wake of the very disappointing Philly Fed data yesterday. The Baker Hughes rig count at 1800GMT (last 709) is also keenly watched in the oil market.
Chart of the Day – DAX Xetra
The DAX had a strong run higher yesterday, however this by no means guarantees the continuation of a nascent technical rally. There are a range of mixed signals which question whether the bulls can maintain control. Firstly, the daily candlestick formation was rather disappointing in that the closing price was in the lower half of the daily range. From a near term exhaustion point of view it is a concern that there is a gap around 10,572 that is still yet to be filled. The other concern is that the rebound high yesterday (at 10,830) has all but again turned lower from another key Fibonacci retracement of 8355/12,390 rally, with the 38.2% Fib level around 10850. The bulls would point to the Stochastics having given a confirmed buy signal, however although the RSI is rising it has merely unwound back to 50 and unwound the previous oversold position. The 21 day moving average has also acted as an important indicator in the past two major near to medium term turning points, providing support in mid-November and then capping the gains in early December. Once again this has caught the resistance of yesterday’s high, with the 21 day ma falling now at 10,870. With around 100 ticks of downside initially today, a breach of yesterday’s low at 10,656 is a bearish move already, whilst the hourly momentum indicators rolling over the bulls look to be under pressure. The key near term reaction low is at 10,459.
The strong dollar impacted forex majors across the board yesterday, but it was interesting that the pressure on the key support at $1.0810 continues to hold (OK so there was an intraday breach by around 10 pips but essentially this is still a key support). I continue to see this as a key medium term barometer of the outlook on EUR/USD. The downside momentum of the pair in the wake of the FOMC meeting is still bearish, with the Stochastics having given a sell signal, however I am still very aware of the importance of this support and until it is breached with confirmation I would not be looking to sell from this level. The bulls have supported overnight and will be looking to push above the resistance band $1.0875/$1.0900 as shown on the hourly chart. However the longer this near term resistance is intact, the more pressure the key $1.0810 support will see. I am still happy to play this range $1.0810/$1.1050 for now, but am ready to turn more bearish if he key support is broken.
Selling rallies on Cable remains the strategy, with the latest leg lower once more leaving a lower high and now what will be a lower low with the breach of the support at $1.4893. Yesterday’s move saw a move to $1.4862 which was around the support of a low back from April, but in truth, there is now very little support until the crucial April low at $1.4563. The daily indicators reflect the selling into strength strategy with all moving averages in decline, and momentum bearishly configured. The overnight rebound has already added over 80 pips and the bulls will be eying the falling 55 hour moving average (c. $1.4965) which has capped recent intraday rallies. The $1.5000 big figure level is a psychological and also price resistance too, so as the oversold indicators unwind this is an area for possible opportunities. The key overhead resistance is $1.5105 now, with the daily chart showing the $1.5200 key barrier also close where the big four month downtrend comes in too. There is much overhead supply to fuel the next down-leg should Cable manage another rally.
The pair has been significantly volatile overnight on the decision by the Bank of Japan to stand pat on monetary policy but instead announce a new program of EFT asset measures. The impact on Dollar/Yen has been to initially send the rate sharply higher but the resistance at 123.67 held up a rally and a reversal at 123.58 has sent the pair all the way lower again. In fact, the chart now looks to be forming a huge bearish engulfing candlestick pattern (although this is clearly very early in the session). This pattern threatens to completely dominate the chart outlook now and would put the bears back in control. The sharp overnight fall has also take the pair back under the 122.20 old key pivot which would add to the negative outlook if it were to close there tonight. Sometimes it is best to let the dust settle on these moves, but clearly there has been a bearish outcome from the BoJ and with the dollar under some corrective pressure today there is a near term downside preference. The next downside level is the 121.30 pivot area, before 120.30.
A sharp bout of selling pressure came through yesterday afternoon to drag gold back for a test of the multi-year lows again at $1045.85. However the bulls have managed to recover some of their poise and stage a minor recovery overnight from a low at $1047.25. However, the daily chart shows that the move simply looks to be a rebound from around the lows of the recent trend channel and with momentum indicators (especially the Stochastics) showing the bears are in control, rallies will continue to be seen as a chance to sell. The intraday hourly chart shows that the rebound (which is gathering pace early I the European session) will now start to come up against overhead supply in the $1060/$1065 region which houses several supports from the past few days. As the hourly indicators unwind this should provide the nest area to look for selling opportunities. The hourly RSI unwinding to 50/60 has tended to be something of a trigger recently. I would expect further pressure on the $1045.85/$1047.25 lows, with a break back below re-opening $1000. The major band of resistance medium term remains $1077/$1098.
The oil price slide seems to be at least one of the reasons why equity markets saw a rally stunted yesterday before turning lower into the close. The selling pressure which had returned in the run up to the Fed announcement, has continued lower and Tuesday’s low at $34.55 is under significant threat. This is a remarkable turnaround in the outlook for WTI which looks to now be closing out a volatile final full week of the year with the bears once more well and truly in control. The concern is that the bearish momentum has been given further downside potential with the RSI only trading around 30 (the August sell-off bottomed at 20 on the RSI), whilst the MACD lines are in bearish decline and the Stochastics have turned lower again. A breach of the $34.55 low re-opens the critical support of the 2008/2009 lows between $32.40/$33.50. The intraday hourly chart shows there is resistance for a near term rally now in the range $36.00/$36.65 as rallies should now be seen as a chance to sell.