The is plenty for markets to contemplate as trading begins for August. The dollar has been under huge pressure in recent weeks as traders have factored for an underperforming US economy due to the alarming second wave COVID infections. However, as other countries increasingly find their own problems with second waves (the Australian state of Victoria going back into lockdown), perhaps the US dollar may begin to find some respite? Could a rebound on the dollar become an August story? Hints of a dollar rally this morning, but as yet nothing confirmed. It may depend upon leaders in Congress coming to an agreement on how to react as emergency US employment support expires. As yet, there is no consensus of how to push forward, but another fiscal package to support the labor market would help to allay fears of faltering consumer confidence. Risk appetite has certainly been wavering in recent sessions, but the better than expected China Caixin Manufacturing PMI has helped to prop up sentiment this morning. The manufacturing PMIs for July could be a driving factor through today’s session, with eyes on the ISM data later today.
Wall Street closed a tumultuous session on Friday with S&P 500 gains of +0.8% at 3271, whilst futures are a touch weaker today with the E-mini S&Ps -0.1%. Asian markets took the lead from the Chinese PMIs with the Nikkei +2.2% and Shanghai Composite +1.4%. In Europe there is a mixed look to early moves, with FTSE futures -0.2% and DAX futures +0.2%. In forex, USD is climbing through the majors, with CHF and AUD primarily weaker. In commodities, hints of a dollar rebound are weighing slightly on gold and silver, whilst oil is just under -1% lower.
The first trading day of the month is PMI day for the economic calendar. The Eurozone final Manufacturing PMI for July is at 0900BST and is expected to be unrevised from 51.1 (flash July 51.1 up from 47.4 final June). UK Final Manufacturing PMI is at 0930BST and is expected to also be unrevised at 53.6 (53.6 flash July, up from 50.1 final reading of June). The US ISM Manufacturing at 1500BST is expected to improve to 53.6 (up from 52.6 in June).
Chart of the Day – German DAX
After coming under increasing selling pressure in recent sessions, there needs to be a significant response by the DAX bulls early this week. Having seen the risk rally fall over at a July high of 13,314, almost every session in the past eight have seen the bears prevailing to leave a negative candlestick formation. This has really ramped up as the market has now broken the first really important support if the mid-July low at 12,416. With a decisive breach of the old pivot at 12,470 the bears now look to be in near term control. Accompanied by increasingly deteriorating momentum, with the MACD lines accelerating lower, RSI and Stochastics are falling at their lowest level for several months. With Friday’s failure of an attempted rally, there is now a band of resistance 12,416/12,525 that needs to be overcome to suggest the bulls are fighting back. Given the recent run of bear candles and intraday failed rallies, there is a downside bias towards testing the old June supports now. Initial support is 11,957 but the crucial support on a medium term perspective is now at 11,598. To break what is now a corrective phase, the bulls need to move back above resistance in the band 12,745/12,915.
The euro has rallied a long way in the past month. An accelerating bull move added over 700 pips but the move looks to be beginning to stall now. We see similar hallmarks to the move of early June, where an acceleration higher stuttered initially before one more pull higher prior to an unwind. With the RSI recently peaking over 80 and beginning to tail off, along with bear crossing on Stochastics, we see this as being a similar situation now. Friday’s -70 pip decline and decisive negative candle suggests that a degree of corrective slide could be developing. The hourly chart is beginning to threaten a correction and how the bulls respond to Friday’s sell-off could be key today. There has not been two consecutive negative sessions since late June. A move under 1.1730 would complete a near term topping pattern, breaking the run of higher lows, and develop a new negative trend set up. Below 1.1680/1.1700 would open a deeper corrective unwind. Today’s intraday high of 1.1795 is the first line of resistance.
With momentum stretched after an accelerating bull run, the bulls will need to react to Friday’s stalling candlestick to prevent what could be a corrective move developing on Cable. A candlestick that hinted at exhaustion on Friday, was arguably a shooting star, came after a succession of strong bull sessions. The RSI is historically stretched around 80 and with traders coming back in on Monday morning to see a consolidation, there is a battle for control. Can the bulls prevent the urge to take profits now on an impressive run higher? The hourly chart is hinting that the set up is less positive than it has been for over a week, but is still relatively positive. The support of a two week uptrend comes in around 1.3000 this morning, and hourly chart moves show that there is a basis of support 1.2950/1.3000 which would be the first real band of support to be tested. Coming into the European session, there is a lack of conviction in moves and a lack of direction. The resistance at 1.3200 was considerable earlier in the year, and could again be the excuse for Cable bulls to take a step back once more. As yet though, no conviction.
After days of negative pressure, the bulls spectacularly responded on Friday to leave a low at 104.17 and form a huge bullish engulfing candlestick. Given the incredibly stretched sell-off on the dollar, such a move may not have been so surprising. However, it will be how the bulls react in the first few days of this week which will be far more telling. With a weekend to let the dust settle, will this be just a “dead cat bounce” before the selling simply resumes? The breakdown of the old key floor of 106.00 has left significant overhead supply between 106.00/106.60 and is was notable that the rebound faltered within this band on Friday. Once more this morning, this seems to be resistance as an early move higher has already dissipated at 106.43. The near term threat is still with the rebound though as stretched momentum has further room to unwind. If the RSI unwinds back towards 50, with the significant overhead supply of sellers, it would still be seen as another opportunity to sell? Only above 107.50 would shift this view now.
With such an impressive run higher and momentum indicators still stretched to extreme levels, there are growing questions over just how far the gold rally can go. For now though, the bulls are resisting the temptation to take profits. Throughout last week, there was resistance hit at $1980, however, the all-time high has once more been extended this morning, hitting $1984 early today. This is a difficult moment for the bulls, as there are hints of slowing momentum still on the hourly chart, but without any outright sell signals. Hourly MACD lines and Stochastics are less positively configured, but do not exhibit anything overtly corrective. There are support levels that are being left to take note of. Friday’s initial low at $1960, whilst Thursday’s reaction low at $1940 is a more considerable higher low. If they begin to be broken then there is more reason for the bulls to be worried. For now though the bulls continue to defend well against potential profit taking and $2000 is still a realistic target.
Brent Crude Oil
There is an increasing sense that the bears are feeling their way back into this market now. A few jabs are being thrown in the fight for control, but nothing notable has yet been landed. However, the intraday moves lower are now breaching supports which had previously held firm, something that is a developing warning. Initial support at $42.35 was breached on Thursday with a candle that had a negative configuration but could not sustain the selling pressure in the close. We have spoken previously about the importance of the support at $41.30 being the first real support of note, and for now, this remains intact. However, the bears will be growing in confidence as the candles begin to take an increasingly negative lean. For the first time in weeks, there is an argument for lower highs (at $43,95, under the $44.90 July high) along with lower lows. For now, this is still initial warnings of deterioration, as with RSI still above 50 there is a sense of consolidation rather than correction. However, the longer the bulls fail to push the market forward, the increasingly likely the selling pressure will grow. A close below $42.35 would be a negative signal, whilst a close under $41.30 would open the correction in a decisive way. Initial resistance at $43.95 needs to be cleared to re-open $44.90 and the $45.20 key gap resistance.
Dow Jones Industrial Average
Wall Street markets have become increasingly uncertain in recent sessions. The Dow has now decisively broken its four month recovery trend ana dis now starting to breach supports. However, the move lower lacks conviction. Twice testing sharp moves lower in the past two sessions, the bulls have fought back into the close. Long lower shadows on the candles are key warning signals. We continue to see the market closing in the pivot band 26,300/26,610 but now this pivot is developing into more of a basis of resistance in recent sessions. There needs to be a close back above 26,610 for the bulls to regain some of their lost control and would retest 27,070. Despite this, momentum indicators remain positively configured on a medium term basis, even if they have slid back recently. It would still suggest that weakness still represents a chance to buy. A close under 26,000 would begin to question this outlook though.