Market sentiment seems to be on tenterhook today as the latest round of trade negotiations between the US and China swing round. Whilst traders have been more confident of progress over recent weeks, the fact that the US has filed criminal charges against Meng Wanzhou (the finance director of Huawei) will hardly ingratiate the Chinese delegation for the two day meetings that begin on Wednesday. So far there has been little reaction to this, however, it may hamper progress towards an agreement. In Europe, the Brexit bandwagon rolls back into town once more and it could be a crucial day for the direction that the UK takes. The UK Parliament debates and votes on a number of amendments to Prime Minister May’s deal that she secured from the EU. Amendments (which are yet to be confirmed) possibly include a move to delay Article 50 beyond 29th March, a change to the contentious Irish backstop, a demand to take the prospect of “no deal” off the table, and perhaps even a second referendum. Whichever of these amendments get a majority (perhaps none of them), could then shape Mrs May’s next step with regard to what she goes back to the EU with. Sterling traders will be watching closely, as several of the amendments could force Mrs May into a shift away from a “hard” Brexit which would continue to boost sterling.
Wall Street fell over again last night with the S&P 500 -0.8% at 2644 whilst futures are also ticking a shade lower. However, Asian markets were relatively mixed (Nikkei +0.1%, Shanghai Composite -0.1%) whilst European markets appear to be mildly higher with FTSE futures +0.3% and DAX futures +0.1%. In forex, there is a mixed outlook for the dollar with little real move. Sterling is a shade lower ahead of a crucial day for Brexit, whilst the Kiwi is outperforming. In commodities, with the dollar still sluggish, gold has retained its break above $1300, whilst silver is also still holding its gains. After a big drop yesterday, oil has rebounded around a percent amid reports that Russia will do more to comply with the OPEC+ production restrictions.
The US data will be of interesting in the afternoon with the S&P Case-Shiller House Price Index for December at 1500GMT which is expected to remain at +5.0% (+5.0% in November) having fallen for the past seven months. The Conference Board’s Consumer Confidence for January is at 1500GMT which is expected to drop back to 124.0 (from 128.1 in December) which would be a third month in a row of decline but also the lowest since December 2017. There could also be considerable volatility in the evening with the UK Parliament voting on amendments to the Government’s Withdrawal Agreement.
Chart of the Day – Brent Crude
The oil price has been coming under a degree of pressure in recent days as the market has consolidated. However, it is interesting to see that the outlook for Brent Crude has been deteriorating more than WTI and could be a move that is leading WTI lower. The recovery uptrend since the latter stages of December was broken last week after the market fell over to leave resistance at $63.15. On a technical basis there is worry for the bulls coming through with the marked deterioration in the Stochastics (which have posted a sell signal). A close on the RSI below 50 increases concern, whilst the MACD lines are close to crossing lower too. However, this could still just be playing out as part of the consolidation but breaching initial support at $58.90 would signal a shift in sentiment. This also marks the 23.6% Fibonacci retracement of $86.75/$49.95 sell-off which is a level the market is clearly watching. So is the deterioration in momentum a sign of leading the market lower? Market reaction to yesterday’s strong bear candle will be key now. The hourly chart shows a shift in outlook threatening, and if this initial rally begins to fail under initial resistance $61.90, along with the hourly RSI failing around 60, it would suggest that intraday rallies are being sold into. Above $61.90 improves the outlook again.
The incredible turnaround for the euro on Friday has been held as the market posted another positive candle on Monday and is again holding gains today. This is allowing an upswing across the momentum indicators in a move which seems to affirm the ranging credentials. Subsequently the old situation where corrections to $1.1300 are a buying opportunity, whilst rallies towards $1.1500 become selling opportunities, is back in play. The improvement in the Stochastics suggests that momentum is in positive mode within the range now. Looking at the hourly chart, the old pivot around $1.1420 has been broken and is again being seen as a basis of support today. Whilst the market remains above $1.1420 there is now a positive bias towards $1.1500. A breach of $1.1420 moves the market more mixed, whilst below $1.1390 turns a more negative outlook in the range once more. We are back in the ranging game again.
The sharp run higher on sterling just took a pause yesterday and is slipping a touch further early this morning. Perhaps this is not surprising, given this is another important day for the Brexit process, a day in which the direction of Brexit could change and subsequently that of sterling. Technically coming into today’s session, the outlook remains strong to be bought into weakness. A series of higher lows and higher highs in recent weeks, along with ever improving momentum. A four week uptrend is supportive today around $1.3000, along with a near term pivot there too, and after tonight, any move that holds this will be considered to be a positive for the bulls. Resistance is at Friday’s high of $1.3215 under the key highs of September/October at $1.3260/$1.3300.
The drift off on Dollar/Yen is now testing the recovery outlook. The market has been struggling in a 90 pip range for more than a week now. This tight range comes between a key near term breakout support at 109.10 and under key medium term overhead supply at 109.75/110.00. However in the past few sessions, there have been some negative candles forming and the strong Stochastics have turned lower, now with a sell signal (not yet confirmed). Initial attempts at 109.10 support have held, but a close below would be a negative development for the near to medium term outlook. The hourly chart shows resistance around 109.50 and continual failure under here will only add to the growing negative pressure. Below 109.10 opens 108.65.
The big breakout on Friday has been held, for now. Having rallied sharply through $1298, the breakout resistance of the previous highs between $1295/$1298 becomes a basis of support and that held the initial test yesterday and again into today’s session. This is helping to validate the breakout. Momentum indicators are subsequently holding on to their improving configuration and the hourly chart shows that the intraday unwinding moves are helping to renew upside potential. However, the big test still lies overhead though as the market is now into the long term pivot band $1300/$1310 which has so often provided a key turning point for medium term moves. A closing breakout above $1310 opens the way towards $1366 resistance from the 2018 highs. However, on a nearer term outlook, there is a $22 upside implied target from the breakout meaning $1320 is an interim target. The old mid-range pivot of $1286 is now supportive and the importance of the $1276 support is growing.
Focusing above on the deterioration in the outlook on Brent Crude it is interesting to see WTI now finally breaking its five week recovery uptrend. Yesterday’s decisive negative candle now means that the market response today will be key. WTI is now within touching distance of the key support at $50.50 which is a higher low and the 23.6% Fibonacci retracement at $50.50. What is also striking is that whilst the deterioration in Brent Crude momentum indicators is far more progressed, those for WTI are less so, with signs of a drift rather than a burgeoning corrective move. A decisive bear cross on the Stochastics would though be a warning shot and likely be the first really decisive signal of a correction. Today’s reaction higher has helped to steady some nerves, but if the rebound quickly falls over again, then fears of a test of support will re-surface. However, whilst support at $50.40 remains intact there is still hope for the bulls. The hourly chart shows initial resistance at $53.00 and then $54.25.
Dow Jones Industrial Average
There is far more of an uncertain outlook for the Dow than at almost any other time in January. The market gapped up on Friday only to gap back down again yesterday. It now arguably leaves what could be described as an “evening star candlestick” formation (not entirely a text book version, but the sentiment is a bull failure breakout). This means today’s session is important, and added to that, importance comes with the 50% Fibonacci retracement at 24,333 which has become a key near term basis of support. A closing breach would really be a sentiment changer. Momentum remains positive but is beginning to drift somewhat as the candles in the past week have been increasingly variable. The gap down at 24,677 will now be watched, whilst the resistance of Friday’s high at 24,860 is also increasingly important.