During these summer weeks where the focus is off central banks and monetary policy, one man is doing a remarkable job of giving markets direction. Donald Trump is once more the driver this morning. In a campaign speech last night, he admitted that all EU cars would be subjected to a 25% tariff. There has previously been a consultancy on this issue, with nothing concrete, so does this once more refocus minds on the trade story. Furthermore, he noted that he did not expect much progress out of the talks with China on trade. The market turnaround against the dollar began last week on the news of renewed talks between China and the US, but does this now mean it has gone too far? Intriguingly also there have been two court cases involving Trump’s campaign manager, Paul Manafort and his former lawyer, Michael Cohen, which seem to be making felons of people very close to President Trump. This looks to be serious as, especially with Cohen, it implicates President Trump in the paying off of two women in order to influence the outcome of the election. The implications of this are yet to play out, but is very bad news for the President nonetheless. Subsequently, there are now question marks over the risk rally that has taken Wall Street strongly higher in recent days (S&P hit an all-time intraday high yesterday), but also the dollar correction too. Several of the major charts (covered below) find themselves at key crossroads and how the market moves in the coming days could be key for the near to medium term outlook.
Wall Street closed higher with the S&P 500 +0.2% at 2863, but the futures have tracked lower following the developments in the courtroom. Asian indices have been mixed, with the Nikkei +0.6% but the Shanghai B down -0.8%. European markets are starting the day on the back foot too. In forex, there is more of a mixed outlook forming across major pairs, as the dollar correction seems to have been stemmed for now. In commodities, this is a similar look, with gold ticking -$1 lower, whilst oil continues its recent rebound after the API inventories showed a surprisingly larger than expected crude drawdown.
It is a quiet European morning on the economic calendar for traders, with interest kicking in with the US Existing Home Sales at 1500BST which are expected to improve slightly to 5.44m (from 5.38m last month). The big interest will come in the FOMC minutes for the recent August meeting. A largely uneventful meeting if the statement is anything to go by, but markets will be paying attention to the driver of the upgrade of economic activity to “strong” from the previous “solid”, whilst there will also be a reaction should any significant mention of the trade tariffs be made.
Chart of the Day – NZD/USD
As the US dollar has weakened in recent days, it has allowed a beleaguered Kiwi a rebound. However this recovery still simply looks to be another chance to sell once more within the downtrend. Since NZD/USD started falling back in April, a run of lower highs and lower lows has formed a downtrend, which comes in at $0.6710 today. The concept that old support becomes new resistance rang perfectly true throughout July as the market failed repeatedly to make a move back through the old $0.6850 May low. So focus now turns to the old key $0.6685 July low which is a source of the next sellers. This comes as the RSI is back to 50, where the rallies throughout June/July started to fail (habitually between 45/55). The caveat is that the Stochastics and MACD lines are turning higher to suggest the near term outlook is still improving. However the overhead supply and the downtrend suggests a near term sell zone $0.6685/$0.6710 today and how the market reacts to this band could be a key near term signal for direction. Ultimately, we still favour renewed downside as beings likely and a retest of $0.6545 should be seen. A move above the reaction high at $0.6760 would improve the outlook for the Kiwi and also suggest that the near term correction on the dollar has further legs to run.
The euro has now posted four (and arguably five) positive sessions in a row, which is the first time this has been seen since early March. The move has been impressive in the least and has added over 270 pips since the middle of last week. Pulling decisively through the resistance of the old floor of $1.1505, the bulls are certainly with this move. Near term momentum signals are increasingly positive now, but how far can this move go? The RSI is back into the low 50s, where the momentum continually failed around 55 throughout July. The resistance at $1.1630 is an old pivot and can be taken as a gauge for this move, as a break above this pivot would arguably change the outlook on a more sustainable basis. The big resistance to change the medium term outlook is $1.1850 but a close above $1.1630 would suggest that the aggressive medium term selling had been calmed. Subsequently, this is an important moment for the euro recovery now. The old support at $1.1505 takes on a supportive role once more, with the hourly chart showing support at $1.1490.
The short covering rally on Cable has pulled decisively higher in the past few sessions and accelerated the move with a strong bull candle that added just over 100 pips yesterday. The move has now unwound Cable to the resistance of a four month downtrend. The old support at $1.2955 is now a basis of resistance and will be seen as a key gauge today (the euro has already surpassed its equivalent level on EUR/USD). There is a near term improvement that is underway on the momentum indicators with the MACD and Stochastics tracking higher from bull crosses, but the RSI is now approaching a key medium term barrier around 50 where the rallies have tended to struggle. So this is a key moment for Cable. A move above $1.2955 opens the psychological $1.3000 again. The hourly chart shows strong near term momentum and support around $1.2825.
The corrective outlook has been improved as Dollar/Yen formed a positive candle yesterday and an early move higher today. However, the warning has been given, as the market traded below 110 yesterday. The rebound is also still tracking within a phase of lower highs and lower lows, within which a downtrend comes in around 110.90 today. Furthermore, momentum indicators are still in deterioration mode, with the RSI below 45 and MACD lines still struggling below neutral. Subsequently, rallies are a chance to sell and a renewed negative signal today could be the trigger. A close below 110 would open the low at 109.35 with 108.10 the key medium term support. It would need a close above 111.40 to suggest the bulls were back in control.
As with many charts that are linked to dollar moves, the rebound on gold has reached a key crossroads. The downtrend channel of the past two months comes in today at $1200 and the market is positioned for a key test. Three positive candles in a row has dragged the market up from $1160 but now the price is into a band of old support between $1194 and more importantly $1204. This is a key moment as the momentum indicators have run higher with the rebound and are threatening to lead the market higher. A decisive move on the RSI above 40 would be a two month high and certainly threaten the resistance at $1204. Is this a chance to sell? The initial move in today’s session is lower and if the rally begins to stall then the sellers could take this as another opportunity. The hourly chart shows support at $1187 but also small negative divergences on hourly RSI and MACD which hint at a slowing of the momentum in the rebound. A loss of $1187 would likely trigger renewed selling. A close above $1204 would open $1217/$1220.
The rebound in WTI since the decisive breakdown below the $67.00 pivot last week has been impressive. Four positive sessions in a row, but is this just another chance to sell? The reaction during today’s session could hold the answer. The positive session yesterday actually included a bull failure at $68.10 which formed a disappointing candle in the end. The move not only failed to break through the reaction high of $68.35, it failed at the underside of the old twelve month uptrend, but failed to close above the five week downtrend and pulled the market back to the $67 pivot once more. The roll of the contract overnight means that the market is now trading below the pivot once more. If the market fails to get back above the pivot and perhaps even forms a negative session today, the momentum in the rebound will have been lost and the threat would be for another rally to be sold into. Momentum indicators have looked to tick back higher again, but the medium term corrective configuration continues to suggest that rallies will struggle. The near term importance of today’s session is key. A break back under support at $65.400 would be a be a renewed bear signal.
Dow Jones Industrial Average
The buyers are still in the driving seat, with a fourth straight bull candle formed yesterday. Yet again we had the market gap higher at the open and barely look back. The move has now pushed above not only the late February high of 25,800 but also above the 76.4% Fibonacci retracement at 25,845. This has opened upside towards a full retracement to the all-time highs again at 26,616. With the strength of momentum indicators there is little reason this will not be seen, with the RSI rising at 65 and still with upside potential, whilst the MACD and Stochastics are positively configured again. However, one slight caveat is the small size of the last two candlestick bodies. How the market reacts to an intraday slip will be key now. On the hourly chart there looks to be a rolling over of strong RSI and MACD lines potentially now. This could induce a corrective slip near term. There is initial support 25,750/25,800. The next resistance is a minor high at 26,338.
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