Market fears over what could turn out to be disappointment over US tax reform have hit sentiment on equity markets. There has been little data to drive markets throughout this week, so added focus has been given to the progress of US tax reform through the Congressional committees. It is becoming apparent that the GOP in the Senate and the House of Representatives have a different vision of tax reform and with the Senate version suggesting a 12 month delay to the corporate tax cut, markets are getting jittery. Wall Street sold sharply yesterday and although there was a rebound into the close, the concerns are apparent across markets. The US dollar has been hit near term and the Dollar Index is retreating to a key near term support at 94.10. However, all is not lost yet though as the 10 year Treasury yield which has been pulling lower, has now jumped higher this morning and this is helping to support the dollar. Brexit negotiations continue today and with the EU seemingly giving the UK government two weeks to come up with meaningful proposals on the divorce bill, the Northern Ireland border and EU citizens’ rights, the pressure is mounting. Announcements today could drive sterling volatility.
Wall Street closed lower but well up from the day lows as the S&P 500 was -0.4% at 2585. Asian markets played catch up overnight with the Nikkei -0.8%, whilst European markets are cautious again at the open. In forex, as the Europeans come in and take note of the rising Treasury yields, the dollar is beginning to find some strength again. The underperformance of sterling is clear too with Brexit negotiations in focus. This dollar rebound early today is hampering the rally on gold, whilst oil is mildly back lower after a slight rebound yesterday.
With the US on public holiday for Veterans Day there could be reduced volumes and potentially abnormal volatility. From the economic calendar the main focus will be for UK Industrial Production at 0930GMT which is expected to improve by +0.3% for the month and year on year improve to +1.9% (from +1.6% a month ago). Watch also for the UK’s NIESR GDP estimate for October at 1300GMT which could have an impact on sterling. Despite the public holiday the preliminary reading of University of Michigan Sentiment is at 1500GMT and is expected to pull slightly higher to 100.8 (form the downwardly revised 100.7 last month).
Chart of the Day – DAX Xetra
The corrective forces are certainly growing after the DAX posted a second strong bearish candle in three days. The decline has already unwound back to the support of a ten week uptrend and it will be an important factor I the life of this bull run as to whether the trendline holds now. The concern is that the momentum indicators are notable deteriorating now, with the RSI closing below 60 for the first time in eight weeks, whilst the MACD lines and Stochastics are completing their bear crosses. This all points towards a deterioration in the outlook near term that could result in rallies now being seen as a chance to sell. Today’s cautious open is putting more pressure on the uptrend too. The hourly chart shows the deterioration really took hold yesterday on the breach of the support at 13,340 and this now becomes a basis of resistance. There is also a closed gap at 13,250 which also acts as overhead resistance now. The hourly chart is stretched on the hourly RSI so there could be an initial rebound but the rallies are now a chance to sell. The uptrend support comes in at 13,185 today, whilst the rising 21 day moving average is also a basis of support at 13,170. A retreat to the old breakout at 13,095 could easily be seen now, marking the top of the old consolidation range 12,900/13,095 which is now supportive.
Just as it looked as though the dollar bulls were beginning to pull away again, they have been pegged back. A positive candle added around 45 pips yesterday and is once more up to the key near term resistance of the top neckline at $1.1660. This was a basis of resistance that capped the gains throughout last week and will be seen as a key barrier to a recovery. In the context of the medium term topping phase the absolute level of the neckline at $1.1660 is not really too important. More that there is a sell-zone of overhead supply between $1.1660/$1.1730 which will be watched, as will the falling eight week downtrend which currently comes in at $1.1755. The momentum indicators have ticked higher with the rebound from this week’s low at $1.1552, but there will need to be a far more decisive move to suggest that the bulls are turning a corner. Another failure around $1.1660 is likely to again be seen as a ripe chance to sell. Initial support at $1.1600 and $1.1575.
The sterling bulls are hanging on in there as the long term uptrend provides a rising floor of support. Having tested the support of the range at $1.3025 last week the bulls are now looking to bolster this with a higher low at $1.3085. On a medium term basis there is still a range formation and with momentum indicators that are mildly negatively biased within that range (understandable given the market has traded throughout this week below $1.3175 in the bottom half of the range. Moving averages are clustered and give minimal direction, all suggesting that the market is waiting for its next catalyst to provide direction. This consolidation is reflected also on the hourly chart were momentum indicators oscillate fairly calmly and moving averages are again somewhat indifferent. Brexit negotiations today could be a key mover and a break above $1.3175 would re-open the upper reaches of the five week trading band. Subsequent resistance is $1.3230 which protects the range high at $1.3335.
A decisive breach of the three week uptrend and deterioration in momentum signals show that the dollar bulls have lost the near to medium term control now. For a fifth completed session in the past six the bulls have been unable to make any real impression and the market is now pulling lower to eye the near term key support at 112.95 This is the first higher low to be tested and a breach would confirm the sellers finding control. It would also suggest that a new trend is beginning to form. The momentum indicators are already calling for a breakdown with the RSI at a three week low, whilst the MACD and Stochastics are gaining traction having crossed lower. Yesterday’s initial look at the support bounced off 113.08 but the hourly chart shows negative configuration now on hourly momentum and that intraday rallies are being sold into. Initial resistance is 113.70 but any failure under 114.05 will be seen as a chance to sell. The hourly RSI is consistently failing around 60/65 now. Below 112.95 reopens 111.45/111.65.
Just as Dollar/Yen is rolling over, gold is beginning to find some traction higher. Another positive candle and a two week intraday high suggests that the bulls are gradually clawing a recovery. This is reflected in the momentum indicators which show the RSI, Stochastics and MACD lines all beginning to tick higher. There are key tests ahead though for gold, with a pivot around $1290/$1291 on the immediate horizon today, whilst the long term pivot band $1300/$1310 also lies overhead as a barrier to gains. For now though the market is positioned for a near term recovery. The hourly chart shows a four day uptrend formation with a higher low around $1282 and then $1279.70. Hourly momentum is also in positive configuration. The bulls need to hold on to the hourly RSI above 45 and MAC lines above neutral to continue the recovery momentum.
Posting a positive candle after Wednesday’s bearish key one day reversal at a two year high, questions the prospect of a correction, but does not break it. Whilst the high at $57.92 remains intact the market will be threatening a bout of profit taking. This comes with the RSI still looking stretched, having unwound slightly from record overbought position (dating back to April 2006). However, the bulls will look at the hourly chart and point to the fact that the recent 10 day uptrend is still intact whilst momentum indicators have picked up again around levels where the buyers have been happy to support. This is helping to bolster the support of Wednesday’s low at $56.40, whilst the 89 hour moving average (around $57.00 this morning) is also a basis of support to watch now. The hourly chart suggests the bulls have lost momentum but the market is resisting a sell-off for now. Support at $56.40 could be key.
Dow Jones Industrial Average
With European equity markets turning corrective, Wall Street is also under increasing pressure. The slipping on the momentum indicators that has been developing in recent days now seems to be dragging the Dow lower. This comes with the RSI now closing below 70 for the first time in over five weeks, whilst the MACD lines have completed a bear cross sell signal. The uptrend of the past eight weeks has also been breached as the market has begun to pull lower. The move has also broken below the support of the previous breakout at 23,485 and the longer the market trades below this, the more corrective the outlook becomes. The hourly chart outlook has certainly deteriorated and should the momentum configuration on the hourly chart begin to turn more decisively negative then the selling pressure will ramp up and the speed of a correction would grow. Today’s session could be key though, the Dow bounced almost 150 ticks into the close to leave a long downside tail but only a small candlestick body on the daily chart. Another negative candle would subsequently imply that rallies are being sold into. There is now resistance at 23,485/23,575 under the all-time high of 23,602.