There is something of a dichotomy in major markets right now at the traditional correlation between bond markets and equities has at least temporarily become misaligned. The 10 year Treasury yield fell below 2.60% on Friday to its lowest level since early January. Falling bond yields tend to be a sign of negative sentiment through markets, however Wall Street broke out on Friday with the S&P 500 closing at its highest level since October. What is driving this move? The Federal Reserve monetary policy decision is on Wednesday and after a run of disappointing US data, the expectation is that the Fed’s recent shift away from its erstwhile hawkish position could be more formalised in downward revisions to its economic forecasts. Markets are increasingly pricing that the next move for the Fed will be lower and this is pulling a dollar correction. According to CME FedWatch the probability is now 25% for a rate this year. The dollar has moved into reverse and is under pressure across the majors (with the broad exception of the yen). The market does have a tendency to swing too far one way and then the other. Is this a justifiable outlook one wonders? However, this positioning could remain in place at least until Wednesday’s FOMC decision.
Wall Street closed higher on Friday with a breakout on S&P 500 which closed +0.5% higher at 2822, whilst US futures are edging +0.1% higher today. Asian markets were solidly higher overnight (Nikkei +0.6% and Shanghai Composite +2.4%) whilst European markets look set for a decent open too with FTSE futures +0.3% and DAX futures +0.2% higher. In forex, the slip back on the dollar is being maintained, with the dollar underperformance across the majors with the exception of the safe haven yen. Sterling also remains a maverick with Brexit politics the driver, currently trading lower. The Aussie and Kiwi outperforming reflect the positive appetite for risk. In commodities, the dollar slip is helping gold and silver toe tick higher, whilst oil is mixed early today.
It is a light economic calendar for traders today with only the (National Association of Home Builders) NAHB Housing Market Index at 1400GMT expected to improve to 63 in March (from 62 in February)
Chart of the Day – FTSE 100
The market spent the whole of last week in recovery mode (helped as the market positioned towards pricing for a softer form of Brexit) and this now means that a six week range could be close to a breakout. The mid-February high of 7261 is within sight now and the momentum indicators are suggesting the bulls are ready to make their move. The Stochastics accelerating towards strong configuration, RSI above 60 and the MACD lines on the brink of a bull cross above neutral are encouraging. Friday saw the market breaking decisive above 7200 which has previously been a key barrier and with a decisive bull candle the market moved to a three week high. If the bulls can close above 7261 it would complete the breakout of the six week range and imply an upside target of around 200 ticks. A breakout would mean that 7200/7261 would then become a near term buy zone. The next resistance is not until 7550 and the September high. The hourly chart shows positive momentum configuration with a run of intraday higher lows, meaning that initial pivot support at 7182 needs to be watched as a gauge of the continued run higher.
Consolidating back above the old key level at $1.1300 is key to the continued improvement in the outlook once more. Having broken above this pivot on Wednesday, the market has since been using the pivot as a basis of support. This is helping to improve momentum indicators to build the foundations of a decisive and sustainable recovery. The RSI is above 50 again and MACD lines crossing higher. However, this is the point where the bulls really do pull higher as the longer they procrastinate the more likely they will be nervous in a market which has consistently failed to sustain the rallies in 2019. An early move higher today is a positive step but the hourly chart shows this needs to break through the $1.1350 resistance area. Positive configuration on hourly momentum helps to build confidence. Support is key around $1.1300 and a higher low at $1.1275.
The Cable bulls looked to stabilise their rather volatile position higher on Friday as support formed around $1.3200 with a positive candlestick. It is difficult to talk about the outlook with any degree of conviction right now given the political uncertainty which remains elevated. However, there is a bullish bias still and the market is trading above 10 week uptrend, above the moving averages and momentum indicators retain their positive configuration. The hourly chart still shows support coming in with 50 pip increments at $1.3200, $1.3150, $1.3100 and $1.3050. The outlook will continue to be closely attuned to Brexit developments but the market is pushing on resistance between $1.3300/$1.3383.
Friday’s mildly negative candlestick would have disappointed the bulls who had looked to be finding traction, but seem to again be running within this uptrend with the handbrake applied. There is a positive bias to momentum indicators, whilst a five week uptrend within a larger 10 week uptrend channel is pulling the market higher. Whilst decisive traction is hard to maintain, there is a sense of buying into weakness still. The band of support 110.75/111.00 is in place and the hourly chart shows a market looking to build off 111.40 today. However, this is threatening to become a market that is in need of a catalyst again, as resistance 111.90/112.10 builds. Bullish positioning is preferred, but this is increasingly slow going.
In the wake of Thursday’s extremely disappointing session for the bulls, there was a decent reaction and bounce back into the long term pivot band $1300/$1310. The fact that the bulls responded quickly is an encouraging sign but the long term pivot at $1310 is still a crucial area of resistance that they need to overcome. A close above $1310 remains the signal the bulls need to open the upside once more. However, there is now more of an uncertain outlook to the momentum indicators at this point. With the RSI failing around 50 (needs to push above the mid-50s again) and the MACD lines flattening a shade under neutral, whilst Stochastics also tail off again, all of which reflects the uncertain signals now. There is initial support now at $1292.50 which is above pivot level shown on the hourly chart at $1290 and the key low at $1280. Initial resistance around $1306 from Friday’s high.
Although the bulls appeared to take their foot off the gas towards the end of last week, there is still a breakout holding above the medium term pivot at $58.00. Momentum indicators are looking more positive with the RSI above 60 and Stochastics into strong configuration, all of which suggests that corrective moves are still a chance to buy. The move above the old highs $57.50/$58.00 within the previous range now means that this is a decent buy zone to look out for. Closing consistently above $58.00 opens a $3.50 implied target to $61.50 whilst the 50% Fibonacci retracement at $59.60 is the next consolidation point. With corrections now a chance to buy, breaking out above $58.00 also means that $54.50 is now a key higher low.
Dow Jones Industrial Average
After a few days of consolidation, the bulls looked to be taking on renewed energy on Friday as the market formed a positive candle which seems to have regained the momentum for the push higher. Both RSI and Stochastics had been stuttering, but are now pulling higher with the RSI into the high 50s and Stochastics rising above neutral. It also means that each of the past few sessions have all posted higher daily lows as intraday weakness is being bought into. Leaving a clear trade above the 76.4% Fibonacci retracement (at 25,715) would be a strong signal to suggest the market is back on track for testing the recent February high and resistance of 26,241. The hourly chart shows initial resistance at 26,155.