Traders are cautiously looking forward in anticipation of this week’s FOMC meeting. This could be a meeting that marks a significant crossroads for near to medium term market outlook. With positioning having moved dramatically towards a dovish outlook from the Fed (even if a rate cut is not expected), Friday’s consumer data has given traders pause for thought. A reaction on market is threatening. With retail sales holding up better than expected, yields have again ticked higher, along with the dollar rebound. Have markets gone too far? It is our expectation that positioning has gone too dovish and this will be reflected in the FOMC meeting not meeting expectations on Wednesday. An unwinding move on yields higher and the dollar higher is likely. This comes with a consolidation on Wall Street (which has rebounded in recent weeks on anticipation of a dovish Fed). A false breakout on gold in Friday’s session also looks likely to be hit by profit-taking now. It all boils down to the Fed on Wednesday, but this morning we see consolidation as the dollar bulls have regained some confidence.
Wall Street closed slightly lower on Friday with the S&P 500 -0.2% (at 2887). US futures have rebounded by +0.2% to reclaim those losses. In Asia, an air of consolidation with the Nikkei a shade above neutral, whilst the Shanghai Composite was +0.2%. In Europe, markets are once more following the US futures, with FTSE futures and DAX futures both around +0.1% higher. In forex, there is little real direction aside from a bounce on NZD by +0.3%. In commodities the slip back on gold from Friday’s failed breakout has continued by a further $3. Oil is mixed as the tensions in the Persian Gulf are yet to dissipate.
It is a light day on the economic calendar with nothing of note for the European morning. Into the afternoon, the New York Fed (Empire State) Manufacturing index is at 1330BST and is expected to drop back to +12.8 in June (from +17.8 in May). There is also the National Association of Home Builders (NAHB) Housing Market Index at 1500BST, with consensus looking for the level to remain at 66 in June (66 in May).
Chart of the Day – German DAX
As the market has lost upside momentum in recent sessions there are increasing question marks over the run higher. Finding resistance at 12,227 last week, a lower high in place at 12,202 has been followed by a lower low. This is beginning to pull negatively on the momentum indicators. Worryingly, this is coming around some key medium term levels. The RSI is ticking lower, again and threatening to roll over under 60 would be a disappointment. Furthermore, the MACD lines are struggling around neutral and the Stochastics are bear crossing. Closing below 12,068 which is a near term pivot would be a near term breakdown in the DAX. Rallies are increasingly seen as a chance to sell. A retreat towards a test of initial support at 11,900 would be on whilst the old key pivot at 11,845 comes back into view. An early rally this morning needs to overcome initial resistance (of an old level) at 12,125 to re-open the 12,227 high again. The June reaction high needs to be breached to dispel thoughts of loss of momentum.
We discussed previously above the importance of the old support at $1.1265 and once Friday’s session lost this support, the market just accelerated lower. The concern is that once more this pivot becomes resistance. How quickly the outlook has shifted. In breaching the higher reaction low at $1.1212 on a closing basis, the recovery momentum has been decisively moved into reverse. It comes with a confirmed bear signal on a Stochastics cross lower, whilst the RSI is back under 50 and even MACD lines are close to a bear cross. Downside potential is now growing. Throughout all of the swings lower on Stochastics since mid-January, each time the indicator has retreated back towards 20. This suggests that intraday rallies are a chance to sell, with initial resistance at $1.1265. The hourly chart shows the hourly RSI struggling around 50 and MACD lines consistently under neutral. A move back under $1.1200 initial support re-opens the $1.1110. low.
Similar to EUR/USD, once the initial support had been breached, it opened a decisive move. In the case of Cable, it was losing $1.2650 which is a level that is now overhead supply today. The pressure is back on the key $1.2555 support again. Once more, the worry for the bulls is that momentum has deteriorated, but also with downside potential. The RSI into the low 30s (went to mid-20s in May), whilst Stochastics are accelerating lower and MACD lines about to bear cross. Expect further pressure on $1.2555 and a likely breach which would open $1.2475 the support from December/January. The hourly chart shows the decisive shift in outlook, with the hourly RSI previously oscillating between 30/70 now struggling in the 50s and hitting well below 20 on Friday’s move. Intraday rallies are a chance to sell, with resistance between $1.2630/$1.2650. On a medium term basis, the importance of $1.2760 resistance is growing.
Given the strong move of the dollar on markets such as EUR/USD and GBP/USD, the fact that USD/JPY has only marginally ticked higher reflects the relative strength performance of the yen right now. The impact of a rebound on the dollar has pulled the pair higher, but in the context of the past couple of weeks, the consolidation continues. It is a consolidation that is still effectively an unwind within the downtrend channel. Channel resistance comes in at 109.00 today and given that the 21 day moving average is still a key gauge of capping the upside (also at 109.00 today) this is a confluence worth keeping an eye on. The old support of the May low is also adding to resistance at 109.00. Momentum indicators have been rescued from deterioration and are looking less negatively configured. However they also confirm that this is a drift move and consolidation rather than the precursor to a decisive rally. It would need a move above 110.00 to suggest with any conviction that a decisive rally was forming. Initial support at 108.15 before the key low at 107.80.
Gold broke out to a 2019 high on Friday, but the move looks to have failed on the initial break at least. Closing back under $1348 will have come as a big disappointment after hitting a high at $1358. Posting a doji candle on Friday (akin almost to a shooting star candlestick) will be a corrective signal if followed by a negative candle today. Initial signs are that the slip back is gathering steam. However, for now there is still a positive configuration on momentum with the RSI around 70, MACD lines accelerating higher and Stochastics ticking above 80. The hourly chart shows a band of support $1330/$1338 to hold up a corrective move. For now this disappointment should not be terminal for the bulls, however there needs to be a positive response today. A close above $1348 (not yet seen)would be needed to re-engage the bulls. For now though, watch the hourly chart for signals of correction. The hourly RSI below 35/40 and MACD lines consistently under neutral would suggest growing corrective momentum. Below $1330 adds to the momentum and re-opens $1319/$1324.
The rebound on oil (seen on Thursday following the incident in the Persian Gulf) has steadied the ship (no pun intended) of the sharp correction. It has bolstered support above $50 and also now broken the corrective downtrend. A second positive session is leaking into perhaps a third today. This is helping to bring the momentum indicators to bottom. The MACD lines are worth watching now, closing in on a recovery bull cross. RSI would also be improving on a move above 40. However, this is a move that is not a recovery until the reaction high at $54.85 has been broken. In fact the reaction high from Thursday’s volatile session at $53.45 is also still intact as resistance. On the hourly chart the bulls will be encouraged above $51.70 but for now this is a consolidation still.
Dow Jones Industrial Average
Although the traction has been lost from a recovery, there is a basis of support that is holding firm now. Subsequently the market is in consolidation mode. This comes as the momentum indicators are plateauing. RSI has been around 60 for the past week, whilst the Stochastics are steady just above 80 and MACD lines decelerating their way towards neutral positioning. There is resistance at 26,249 over recent sessions, but equally the bulls are hanging on above the near term breakout which is now supportive at 25,958. This is a market now waiting the next catalyst as hourly indicators unwind back towards neutral positioning too. We are looking for a closing breakout above 26,249 which would open the 26,695 key resistance, the top of what is effectively now an almost five month range. Or a close below 25,958 which opens 25,210 which is an old medium term support.