Market sentiment is clearly very sensitive to the US/China trade dispute. Press reports suggesting that the US had cancelled a meeting with Chinese officials sent US equities sharply lower and safe haven plays found the benefit. Although the response from the White House was that a meeting was never scheduled in the first place, allowing a degree of stability to resume, this just goes to show how volatile the negotiations could become in the coming weeks. It appears possible that the near to medium term prospects for the bulls could be entirely tied to progress in the trade negotiations. If this is the case, the rally (on the likes of equities and oil at least) is once more back to relying on the whims of a maverick US President for success. A fragile rally indeed. However, this morning we see risk appetite benefiting from suggestions of fiscal expansion from the Chinese finance ministry. In a bid to bolster a n economic slowdown in China, the prospect of a package of fiscal stimulus is helping to stabilise cautious market sentiment. The Bank of Japan did very little to change the story of their monetary policy. As predicted, no movement on rates with the deposit rate at -0.1% (-0.1% expected, -0.1% last), whilst maintaining their yield curve control to 10 years around zero and shaving its inflation forecast.
Wall Street closed strongly lower to end a run of winning sessions, with the S&P 500 -1.4% at 2636, however, futures have steadied this morning and are around +0.1% higher. Asian markets have been mixed around flat, with the Nikkei -0.1% and the Shanghai Composite a shade above flat. European markets are however cautiously lower today with FTSE futures -0.3% and DAX futures -0.3%. In forex, there is a slight rebound in sentiment meaning that the yen is underperforming, whilst the euro and sterling find support and the commodity currencies recover (especially the Kiwi after encouraging inflation numbers). In commodities, it is a risk sentiment play, with the safe haven gold broadly flat, whilst silver is around half a percent higher and oil gaining by around +0.5%.
The economic calendar is very light for the European session today, and fails to do a great deal to impact on traders until the Eurozone Consumer Confidence for January at 1500GMT which is expected to fall further to -6.5 (from -6.2 in December) which would be the worst reading since October 2016. Richmond Fed Composite Index for January is also at 1500GMT which is expected to improve back to -6 (from -8 in December).
Chart of the Day – GBP/JPY
Despite a deterioration in risk appetite yesterday which allowed the yen to strengthen across the majors, the support for sterling remained strong and the recovery in Sterling/Yen remains on track. The move has broken a two month downtrend, whilst the 21 day moving average has turned up. Momentum indicators are configured for continued recovery with the MACD lines rising strongly, Stochastics in positive territory and RSI above 50. Last week’s sterling rally above 140.90 was a key breakout as a move above a lower reaction higher for the first time and a move that constructs a new recovery trend. The move has also held this week, with intraday moves dipping back towards 140.90 being bought into. Yesterday’s positive close left a strong candlestick and the bulls have pushed above the recent rally high of 142.20 today which opens a recovery towards 142.75/143.90. This shows that 139.90/140.90 is now growing as a support zone for continued recovery.
The market has been dropping back for the past nine sessions as a trend lower formed, but it is interesting to see the move has been slowing in the early part of this week. This comes as yesterday’s session slipped back to find support around the mild uptrend of the past two months (currently around $1.1335) and then to pick up. Momentum indicators are responding by seeming to now plateau their corrective move, and with the RSI bottoming in the mid-40s this could be significant. However, it is one thing halting a decline, but another forming a recovery. There needs to be a break back above the $1.1420 pivot which remains prevalent on the hourly chart. Hourly indicators are also still simply in consolidation mode. The hourly RSI needs to move decisively above 60, with hourly MACD decisively above neutral. Otherwise the bulls will simply fade again.
There does seem to be an appetite to support sterling now. Once more this week, the market has found support around the $1.2815 breakout and is looking to push higher again. Effectively, Cable is trading in a tight 200 pip range now between $1.2800/$1.3000 and with yesterday’s decisive positive candle, the bulls will have designs on a test of resistance again. Technically there is a decent set-up for gains, with the momentum indicators retaining a positive bias, as RSI pushes back above 60, MACD lines rise in positive territory and the Stochastics tick higher within a positive configuration. A close above $1.3000 would be some achievement but there is still loads of resistance to overcome at $1.3070 and then $1.3175.The hourly chart shows minor support around $1.2900/$1.2915 initially now.
With the recovery faltering in the past couple of sessions, the potential has been that the bulls could just roll over and the market move into retreat once more. However, the response has been positive overnight. We discussed the importance of the breakout at 109.10 which is in effect the neckline of a small base pattern (which still implies 110.40). This remains a key line of support to watch as the market has picked up again this morning. What we now see is that the resistance at 109.88 from last Friday is now an important level to watch. A really positive response would be for the bulls to react and push through this resistance today. However, there is a band of resistance of overhead supply at 109.75/110.00 from old key lows that remain an issue for the bulls. Momentum is still near term positive for the recovery, but the longer this resistance lasts, the bulls will be getting worried.
Support at $1276 remains intact as despite a second consecutive session of testing, the bulls held firm. However, the concern is that momentum indicators are deteriorating sharply and could well be calling the market lower for a breach of $1276. Stochastics are accelerating towards negative configuration, whilst the MACD lines are pulling sharply lower, whilst if the RSI dropped under 50 this would complete the set. If there were to be a decisive closing breach of $1276 it would complete a small $22 top pattern and imply a retreat towards $1254 in the near term. There is initial minor pivot support at $1266, however looking further out, with the positive set up of medium to longer term technicals, any near term correction would still be seen to be a chance to buy. However, the bulls are hanging on to the support at $1276 for now and on the rebound will be eyeing a move above $1286 initially which on the hourly chart is an area of overhead supply initially. A close above $1286 would begin to drive a more positive outlook within the mini range again and the resistance at $1298 would come back into view.
As risk appetite suffered a dip yesterday, WTI oil formed a sizeable bear candle in a move that suddenly questions the recovery again. Ultimately, though the key support to watch is still the higher low at $50.40 which is in the key pivot band $49.40/$50.50 whilst the 23.6% Fibonacci retracement of the big bear move at $50.50 is also a key consolidation point. There has been a recovery uptrend in the past four weeks which comes in at $51.70 (the equivalent uptrend on Brent Crude has been breached) and remains supportive today. Initially, the bulls have responded well to yesterday’s sharp correction which could shape the near term outlook now. Momentum indicators remain positively configured, although they could quickly deteriorate with another negative session or two, so need to be watched. Yesterday’s high of $54.25 is open again, but the resistance overhead is growing between $54.25/$54.75. For now, weakness is is still likely to be an unwinding move to act as a chance to buy, but caution is needed if today’s session slips back again.
Dow Jones Industrial Average
With the first really negative candle in over two weeks, the bulls are now facing questions over the sustainability of the recovery. The first test is the 50% Fibonacci retracement of the big bear move from the all time high of 26,952 to the December low at 21,713 which comes in at 24,333. Having broken to the upside on Friday, this becomes a basis of support. Breached marginally on an intraday basis, the Fib level held into the close. There is effectively a near term band of support then, between the breakout pivot around 24,000 and the Fib at 24,333. How the bulls respond here will be key for maintaining the momentum of the rally. The Stochastics have rolled over (not yet a sell signal though), whilst RSI remains above 50 and MACD lines are rising. For now this is a blip within the run higher, but this band of support needs to hold. Resistance is initially at yesterday’s high of 24,607 and Friday’s high which now becomes a key gauge at 24,750.