Last updated: May 3rd, 2017 at 09:58 pm
After two days of rather drastic selling pressure in the wake of Brexit, there are signs that markets may be settling for a bit of respite as risk appetite improves. Having sold off more than 11% in just two days, sterling has bounced this morning and investors are taking on a bit more risk. Treasury yields are relatively settled, gold is lower, the dollar is weaker and equity markets are trading higher in early moves. The concern would be that this is just a dead cat bounce and traders simply see this as another chance to sell, however for now the outlook is a little more positive.
Wall Street may have closed with sharp losses (S&P 500 down 1.8%) but Asian markets have been mixed overnight with the Nikkei up +0.1%. European markets are also trading with gains today. In forex, there is a negative dollar outlook, with the euro and sterling both higher and the commodity currencies also stronger. Interestingly though the yen remains positive against the dollar, something that might just keep a lid on any thought of a risk rally today. Despite the dollar weakness, the improved outlook on risk is pulling gold slightly lower today, whilst the oil price is also 1.5% higher.
Traders will be looking out for US data this afternoon with the final reading of Q1 US GDP at 1330BST which is expected to be revised higher again to +1.0% (from +0.8%). The S&P Case Shiller Home Prices Index is at 1400BST and is expected to improve slightly to 5.5%. The Conference Board’s Consumer Confidence is also at 1500BST and is expected to improve slightly to93.2 (from 92.6).
Chart of the Day – FTSE 100
The sell-off on the FTSE 100 has turned around, but how long will this bounce last for? The momentum generated to the downside in the past couple of sessions impacted on the technical outlook and to drive a bearish near to medium term outlook, but the rebound today suggests that the volatility can work both ways still. As yet the selling pressure has not changed the outlook bearish yet and there are still some key levels of support that are in place to help prevent the bears driving the market lower. It will be interesting to see if these levels can be protected in the coming days and todays support is a positive sign. The mid-June support at 5900 was briefly breached on a spike low on the open of trading on Friday but this is still in place as support and is the next low to test. The low at 5788 will now be seen as the key low. The concern is that momentum indicators have given a range of bear signals, with the crossover on the Stochastics, the MACD lines crossing lower below neutral and the RSI which has further downside potential. The hourly chart shows yesterday’s move below the intraday support at 5990 was a concern but an early rebound today has left near term support at 5959 and it will be interesting to see is there can be a close above 6036 which was the old key range floor. If the FTSE can manage to close decisively back above this then perhaps the bulls can start to sustainably regroup again. However, for now, the concern is that with the volatility, selling into rebounds still could be seen as the outlook to play now. The technicals support further weakness but it will be interesting to see for how long.
After two days of huge selling pressure there are just a few signs that the volatility may be starting to settle slightly. The euro has bounced overnight and now it will be very interesting to see how the European traders react to the mild gains in the Asian session. Will they add to the support, or will it be seen as another chance to sell. Technically the closing price below $1.1050 which has been the bottom of the long term pivot band suggests that there will be further weakness back towards the $1.0800 support band in the coming days and weeks. The resistance overhead at $1.1100 will be watched as a key resistance, however the likelihood is that near term rallies will be seen as a chance to sell now. I expect a retest of yesterday’s low at $1.0968 and pressure back on Friday’s low of $1.0909 in due course. The hourly chart shows oversold indicators unwinding which will help to renew downside potential.
The significant volatility continued yesterday and shows little sign of abating again today. As with the euro, it will be interesting to see how the European traders react to the overnight rebound. In this Brexit scenario, calling the bottom in Sterling would be incredibly difficult as we saw on Friday with a 460 pip rally that was subsequently lost again to hit a new 31 year low of $1.3118 yesterday. Having bounced over 200 pips since that low, there will be those tempted to call a bottom, however this is far too early. I expect that this rally will again be seize upon and that further weakness is likely in due course. Daily momentum indicators are with the bears with the Stochastics and MACD lines negatively configured but also have further downside potential with the RSI only around 30. The hourly chart shows $1.3450 is a resistance from yesterday’s high but whether Cable can reach there without the bears pouncing again remains to be seen.
After the mayhem of Friday, we had a relatively settled candle and trading session yesterday. A daily range of just over 100 pips and only mild losses has been followed by early suggestions of further settled trading again in today’s Asian session. The technical outlook of the daily momentum indicators remains negatively configured but the hourly chart shows some support now developing at 101.43 and it will be interesting to see if this can now build. However, whilst the resistance at 103.18 remains intact there will still be a feeling that this could just be minor respite within the bear pressure that is allowing oversold momentum to unwind. A breach of 101.43 re-opens 100 psychological support and then 99.88 and the key low at 99.09.
In yesterday’s daily analysis video on gold I was beginning to question how strong the gold price rally was and perhaps now we are seeing the bulls just have their grip of control loosened a touch. Yesterday’s close may have been positive but the candle reflects a more reticent outlook for the bulls. This has been followed by some minor profit taking in the Asian session. Whilst gold continues to trade above the support of the old $1303/$1306 resistance the outlook will remain positive, however there may be limited gains. The hourly chart shows the breach of yesterday’s low already today and the prospect of leaving another near term lower high at $1329.50 under $1335. The hourly chart shows the importance of the support at $1306 and a breach would suggest a change of control. For now though this remains a consolidation within the breakout, but as with many other moves seen today it will be interesting to see whether this turns into a proper retracement.
After yesterday’s early gains were wiped out into the close, once more this morning we see a rally and therefore question its longevity. Another bearish candle has confirmed the large bearish outside day on Friday and it will be interesting to see if this morning’s bounce is anything more than another chance to sell. The momentum in the correction of the past two days continues with negative configuration on the daily studies, shown through with the Stochastics sell signal and the RSI which is falling sharply. A test of the key low at $45.83 was hit to the tick before a bounce yesterday and for now this level, which is a key support in the health of medium term recovery, has held. A failure would then mean posting a lower high and lower low and would put pressure back on the key May low at $43.03. That makes this morning’s rally extremely important for the outlook as the bulls need it to hold. The resistance at $47.95 from Monday’s high now becomes key. The bears are ready to take control and a confirmed closing break of $45.83 would really pose some significant questions for risk appetite.
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