Last updated: May 3rd, 2017 at 09:58 pm
The recovery in risk appetite in the past few days has resulted in some significant retracement moves for both sterling and the yen. However on Wednesday morning there are a few signs that suggest that the recovery in sentiment is stalling and being questioned once more as the safe havens find support once more. There are signs of profit taking on some of these moves on riskier assets, and a mild return of the safer haven preference. The yen has just regathered some of its lost poise today, trading slightly stronger again after comments from Japanese officials refuting suggestions of helicopter money in Japan. The risker forex majors such as the Aussie and Kiwi are also reacting to this and are trading lower. Gold has also found support after a corrective move yesterday, whilst Treasury yields are also starting to fall back again. Despite another move into all-time highs on Wall Street with the S&P 500 up another 0.7% and Asian markets showing gains overnight (Nikkei +0.8%) there is a more cautious open for European indices today. Despite this though, sterling remains bid on the day that Theresa May is set to officially become Prime Minister. However with the prospect of a Bank of England rate cut tomorrow, this could restrict the recovery on sterling.
Traders again have not got too much to wait for in terms of economic data, with only really the Bank of Canada monetary policy at 1500BST which is not expected to change from +0.5%.
Chart of the Day – Silver
Even though gold is starting to correct, the performance of silver in the past couple of sessions has been strong and there is no significant outward sign of a correction being imminent. However, the decline of gold suggests that we should be on the lookout for some early signals for a slide on silver. The momentum indicators on silver have been strong, and in fact, the Stochastics have just crossed higher again following the strong bull candle on Thursday which is still having a legacy. Furthermore, the RSI has held above 70 and the MACD lines are still rising. However we need to watch out for the Stochastics falling back below 66 which would be a 5 week low, whilst the RSI falling below 70 would also be a profit-taking signal. The hourly chart shows that the price is now in a short term consolidation range between Non-farm Payrolls spike low at $19.20 and resistance at $21.07 with all the moving averages clustered and flattening. The hourly chart shows there is a near term pivot around $20.00 and if this is consistently breached it would re-open support at $19.50 and then the payrolls spike low of $19.20. Hourly momentum indicators and hourly moving averages are all looking increasingly rangebound.
One of the reasons why candlesticks and bars are so much more useful as charting techniques compared to a line chart is playing out through the euro right now. The euro has closed within 7 pips for the past four sessions, as a consolidation has formed around the old long term pivot band. The candles give a lot more information though, with a failed upside recovery yesterday which has formed what is only a few pips away from being a gravestone doji (open and close towards the lows with a failed upside move). This reflects the uncertainty (with the doji) but also that the bulls are not in a position to take control again. I am still a seller into strength and the this move reflects this. The momentum remains negatively configured for a continued correction over the medium term and I expect a retest of $1.1000 support before $1.0909 is again seen. However, the consolidation needs to resolve with a close below $1.1050 first which could re-open the bear control. There is now a band of resistance $1.1100 to $1.1125 to use for a selling opportunity.
The retracement on sterling has now formed a third completed bull candle and is looking to add to the gains today. On a technical basis the rebound is gathering momentum with the MACD lines bottoming and the Stochastics turning up. However the move is now back into the resistance band between $1.3200 and up towards $1.3563. The rebound is also now at the 23.6% Fibonacci retracement of the Brexit sell-off from $1.5018/$1.2796 at $1.3320. For now the momentum is with the rebound, however, this is an area where I am starting to look for the next sell signal as I see this as an oversold technical rally and not the beginning of a sustained recovery. The hourly chart shows strong near term momentum but watch for some sell signals with the MACD lines threatening to turn lower and the Stochastics also just rolling over. A move back below $1.3200 which is an old support area could be a trigger for the sellers to resume. The sell-off could be induces by Mark Carney too tomorrow with the Bank of England monetary policy in which there could be a rate cut.
The strength of the rally on Dollar/Yen has been impressive. Since hitting a low of 100.02 on Friday the sharp two day rally has almost retraced 500 pips. However I still see this as a chance to sell and am looking now for the next sell signal. This is because the resistance band is between 103.60/106.80 and I see this as a “sell zone” of overhead supply. The momentum indicators have ticked higher and reflect an improvement in the outlook in the past couple of days, however there is still a suggestion that this is just an unwinding move. The pair has already threatened to roll over again with some early weakness in the Asian session and it will be interesting to see if this continues through European and US hours. The hourly momentum indicators have turned a touch more corrective with the move. The support around 103.60 will be interesting as a breach could re-open the selling pressure. Yesterday’s high at 104.97 is resistance with 105.50 adding to the overhead supply in this range. There is further support near term at 102.42.
I have been contemplating the prospects of a near term correction for a few days and a strong bearish candle has confirmed the move. Losing around $28 on the day and breaching a series of supports was in keeping with the shift away from safer haven plays (such as gold) and into more risky assets. However, I still see this as a near term move. The breach of the support at $1338 may open for further retracement back towards the $1306 breakout however I view the corrective outlook on the momentum indicators as simply unwinding the near term overstretched bull position and one which should be a good opportunity to buy for medium to longer term plays. Already today there is a potential that the bulls are ready to support with some overnight support at $1327.30. Holding a move back above $1335 would be a near term improvement as this has played as a pivot level. There is now overhead resistance around $1350.
The neckline of the corrective pattern has been broken back through as a rally has kicked in. Does this mean that the bears are ready to give in? I do not believe that this recovery move will last long before finding the next resistance. In the past 5 weeks the market has posted a series of lower highs as rallies have continued to fail at lower levels and I do not see this latest rally as any different. The MACD lines have been falling, the Stochastics are negatively configured and the RSI is confirming the posting of lower highs. The neckline which is a resistance band $47.75/$46.00 was breached yesterday but there is now a large amount of overhead supply up towards the pivot band around $48.00 and I expect the next lower high to be in this area. Already overnight there is a threat of a top coming in at $46.93 as the hourly indicators all roll over again. The hourly chart shows the oversold momentum has unwound and this should now have helped to renew downside potential. Today the neckline around $45.83 becomes important again as a move back below it could see the selling pressure resume. A close above $48.25 is needed to improve the outlook but there is still a downtrend currently at $49.00 still to breach.
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