With markets responding to a raft of negative newsflow yesterday, there was a knee jerk reaction across majors. However, the move out of risk and into safety seems to have been fleeting. Traders are weighing the implications of the Coronavirus. With nine confirmed deaths in China, is now present across South East Asia and that has seen its first confirmed case in the US. If the Coronavirus becomes an epidemic similar to the SARS outbreak in 2003, then it could sustainably dampen confidence and sentiment. It could be a turning point for what has been a strong start to 2020 (at least for equities). However, not yet, it would seem. The negative other factors (Moody’s Hong Kong downgrade, IMF global growth downward revision) which hampered sentiment are being quickly priced in. Already we are seeing Treasury yields picking up, there has been a failed upside break on gold, and equity futures are rebounding. Even the Chinese yuan has settled its selling pressure for now. It seems that the negative sentiment has been contained, for now, but we still need to be on alert for how key gauges (such as the Dollar/Yuan rate) react in the coming days.
Wall Street closed lower with -0.3% down on S&P 500 to 3321, but US futures are higher by +0.5%. This has allowed a rebound in Asian markets with the Nikkei +0.7% higher and the Shanghai Composite +0.3% higher. European markets look set for a decent open too, with the FTSE futures +0.3% and DAX futures +0.5%. In forex, the is a mild USD positive move, with safe havens such as JPY and CHF underperforming. It is also interesting to see GBP holding on to yesterday’s recovery. In commodities the slip back on gold will be a concern for the bulls, whilst oil is again around half a percent lower.
It is a quiet morning for European traders looking at the economic calendar today. UK Net Public Borrowing for December at 0930GMT is expected to be adding to the deficit by £4.6bn (higher borrowing than the £2.2bn in December last year). Into the European afternoon, Canadian inflation is at 1330GMT which is expected to remain at +2.2% in December (+2.2% in November). The Bank of Canada monetary policy decision is not expected to move rates at +1.75% (+1.75% last). US Existing Home Sales are expected to grow by +1.3% o the month to 5.43m in December (after falling by -1.7% to 5.35m in November).
Chart of the Day – Silver
The precious metals have been looking to improve in the past week, but the situation has turned sharply on its head yesterday as a recovery on silver really hit the buffers. The subsequent negative candle formation (big bearish outside day) has come in a manner that will be quite alarming for the bulls. Earlier in January, we were concerned that a corrective move could end up forming a multi-week top pattern. A rebound off $17.64 helped to prevent this initially but this support is coming under growing threat again. Twice in the past two sessions, this level is being tested and a closing breach would complete a breakdown. The 50% Fibonacci retracement (of $16.50/$18.85) at $17.67 has also become a key gauge as yesterday’s intraday decline rebounded off $17.60. For now, the bulls are hanging on, however the slide back on momentum indicators is adding to growing concern. The RSI is toying with the 50 level, whilst MACD lines are still sliding back and Stochastics are looking precarious too. Any further deterioration in momentum could be a lead on a price breakdown. A close below $17.64 implies $17.15 initially, with the 61.8% Fibonacci retracement at $17.30 around an old pivot support. Resistance of last week’s rebound high at $18.16 is increasingly important now and is a level that the bulls will be looking towards for a resumption of their control.
The euro remains on the brink of a key inflection point as the January ECB meeting approaches. The bulls will have been chastened as a dip below $1.1100 has come and EUR/USD is now testing the support of a key three and a half month uptrend. The trend is supportive today at $1.1075 which is above the support of the first key higher low at $1.1065. This higher low at $1.1065 is crucial as if broken on a closing basis, it would suggest a new bear trend formation is taking prominence. For now, momentum indicators are holding up, but there is a sense of deterioration setting in through the Stochastics (falling below 20) and the MACD lines which are dropping back to neutral. Whilst the RSI remains above 40 there is still a broadly positive medium term outlook. Given how the market sold off decisively into the close yesterday, it is clear that the bears are in the ascendency as rallies are a chance to sell. The old $1.1100 pivot is a basis of resistance under $1.1120 of yesterday’s high.
The sterling bulls gave an impressive reaction yesterday in the face of broad market dollar strength. Posting an encouraging positive candle, once more, Cable has picked up from the medium term support band $1.2900/$1.3000. This is helping to sustain what we still see as a buy into weakness strategy. The recovery is now testing the resistance of a three week downtrend (at $1.3085 today). The support is holding at higher levels too, above the $1.2900 key December low, with $1.2950 and $1.2960 in the past two weeks. Momentum indicators are holding up well but there is still a sense that the sterling bulls are hanging on, rather than building a solid foundation of recovery. For this to change firstly the downtrend needs to be breached, but also the reaction high at $1.3117. Only then would a sense of new trend (a recovery) begin to really take hold.
The first signs of negative pressure on Dollar/Yen for almost two weeks showed through during yesterday’s negative session. A decisive bear candle is now setting a market into a near term range above the key breakout support at 109.70. A positive reaction this morning is suggesting that downside is still restricted for now, but the impetus of the early January bull run has seeped away, for now. Despite this though, whilst the underlying demand around 109.70 (after series of key highs throughout November and December) remains intact, the outlook will remain positive. As such, momentum indicators are entering more of a holding configuration. The RSI rolling over and back around 60, as MACD lines begin to tail off and Stochastics also settle sideways. A close below 109.70 would move the market into a more corrective outlook, but for now, this is a consolidation under 110.28 resistance.
Following yesterday’s failed upside break, the bulls may be starting to grow concerned. This failed breakout has also now turned lower this morning, and the support of what has been a five week uptrend is being tested (supports at $1548 today). For now, this is all part of a consolidation of the past two weeks, and uptrends can often be broken by consolidation without any bearish connotations. So the 38.2% Fibonacci retracement again becomes a key gauge (at $1548), especially on a closing basis. However, the momentum indicators are flashing at least an amber warning light. They are all dipping back again, and if the RSI moves decisively below 60, whilst Stochastics fall away and MACD lines pick up negative pace, this would be a bigger concern. The hourly chart shows a slightly more corrective configuration forming, but the pivot support at $1546 is holding. Resistance initially at $1560 now under yesterday’s high failure resistance at $1568.
Oil confirmed an intraday failure rally yesterday, leaving a decisive negative candle and the market pressuring the three month uptrend. The move is once more testing the old pivot band $57.35/$57.85 and with the trendline support at $57.65 today, this is clearly a key moment for WTI. Furthermore, with the momentum indicators still holding around their medium term key levels, this inflection point could be crucial for a medium term outlook. A close under $57.35 would really begin to question the bull control and open a deeper retracement towards the key low at $55.00. The hourly chart shows a near term outlook under corrective pressure again as rallies are stalling around 50/60 on hourly RSI and neutral is suddenly a barrier on hourly MACD. Under resistance at $59.75, yesterday’s intraday high of $58.60 needs to be breached to begin thoughts of recovery again.
Dow Jones Industrial Average
The Dow slipped back during yesterday’s session as the market retreated back from an all-time high of 29,373. However, this move looks to once more be a chance to buy. During the bull run higher since the beginning of December, the Dow has had the odd blip here and there, but there have never been more than two negative candles in a row before the buying pressure set in. So, with the breakout support band of28,798/29,010 looming along with the support of a five week uptrend at 28,875 today, this would be a prime area to look for the next higher low. Momentum indicators remain positively configured and are just seeing a slight unwind (on RSI at least). So we look for weakness to be the next chance to buy for a retest of the 29,373 high and beyond. This argument breaks down on a near to medium term basis below support at 28,376.