With the prospect of agreement in Congress over a fiscal support package still some way off, Wall Street sold off into the close last night and leaves a question mark over the tone of risk appetite coming into today’s session. A “bearish engulfing” candlestick on the S&P 500 (also known as a bearish key one day reversal) meant that the index just failed at reaching its all-time high and could now begin to weigh on the outlook for equities. Despite this though, the sharp rise in Treasury yields is still playing out and this is impacting across dollar major pairs and has driven an enormous corrective sell-off on gold and silver. The Dollar Index would take another step forward in recovery on a move above 94.00 (which would equate to moving below 1.1695 on EUR/USD and sub 1.2980 on Cable. The Reserve Bank of New Zealand did little to change its monetary policy stance overnight (as expected), but continues to prepare for the potential of further easing, including the use of negative rates if needed. UK GDP for Q2 showed a growth contraction of -20.4% which shows the extent of the huge economic hit of the pandemic.
Wall Street ended the session on a sour note last night as selling pressure accelerated into the close, with the S&P 500 -0.8% at 3333. Futures have stabilised this morning and are looking mildly positive (E-mini S&Ps +0.5%) which has helped Asian markets (Nikkei +0.4%, although Shanghai Composite was -0.9%). In Europe, markets are looking mixed, with FTSE futures +0.2% but DAX futures -0.2% (when FTSE outperforms DAX it tends to come with mild risk negative tone). In forex, the USD rebound continues to run, with JPY under pressure (as Treasury yields continue to rise) but also AUD and NZD weaker (the latter feeling the hit of the RBNZ meeting). In commodities, it has been a wild night for gold and silver although both are a shade higher coming into the European session. Oil is over +1% higher and it will be interesting to see if the bulls can hang on this time.
On the economic calendar, the main focus is for US inflation at 1330BST which is expected to see US headline CPI growing by +0.3% on the month to leave the year on year CPI +0.8% higher in July (which is an increase from +0.6% in June). US core CPI is expected to grow by +0.2% on the month which would mean the year on year inflation slips back to +1.1% (from +1.2% in June). The EIA Crude Oil Inventories at 1530BST are expected to show another drawdown of -3.1m barrels (-7.4m barrels last week).
There is also a Fed speaker to watch out for with the FOMC’s Robert Kaplan (voter, centrist) at 1600BST.
Chart of the Day – DAX Xetra
The outlook for the DAX has improved with yesterday’s strong session which added over +200 ticks. There seemed to have been a shift in sentiment. After several negative candles stuttering at resistance around 12,750/12,800 suddenly the bulls have broken out. The main technical improvement has come in the market ending the sequence of lower highs of the past few weeks. Leaving a higher low at 12,517 now means higher lows and higher highs, the building blocks of a new positive trend. Pulling through the resistance band 12,750/12,915 has put the bulls back in control. This is beginning to drive a more positive configuration on daily momentum indicators, with the RSI accelerating into the 50s and Stochastics also pulling higher, whilst MACD lines are looking set to bull cross. After the disappointing close on Wall Street, there could be some early weakness today, but the bulls will now looking to use 12,750/12,915 as a basis of support to build from. The bulls will now look for a close above 12,915 to confirm the improvement and then to open the July high of 13,313 as the next test. Support at 12,517 is now a higher low above 12,255 which is increasingly important as a basis of support now.
Yesterday’s session confirms that there has been a change in sentiment for the dollar. The European morning looked to be driving EUR/USD back higher, but a bull failure has left a growing negative bias within the trading range 1.1695/1.1915 which could end up now being a top pattern. Momentum indicators are increasingly set up for a corrective move, with near term bear cross sell signals on MACD and Stochastics, whilst RSI is now back under 60. A close under 1.1695 would complete the top and imply around -220 pips of corrective move, back towards the old key 1.1490/1.1500 breakout area. The near three month uptrend support comes in at 1.1530 today. The hourly chart reflects the growing negative bias now on EUR/USD, with the failure once more around 1.1800 which grows ever more prevalent as a pivot (currently resistance). Hourly momentum also suggests that intraday rebounds are a chance to sell for the test of 1.1695. Initial support beyond a breakdown comes in at 1.1580/1.1625. A decisive move above 1.1800 would improve the near term outlook within the 220 pip range again.
With a similar looking configuration to that of EUR/USD, we see Cable is also developing a negative bias within its near two week trading range now. Again a bull failure in yesterday’s session leaves the market at risk of a near term top pattern. The range between 1.2980/1.3185 (205 pips) means that a closing breakdown below 1.2980 would imply a pullback towards 1.2775. It would mean that the 1.2810 old breakout, which is now supportive, would become a prime target area. Momentum indicators are not as developed in their corrective set up as EUR/USD but MACD lines are in the process of now bear crossing, whilst RSI and Stochastics are also sliding. The hourly chart reflects this bear bias, with the resistance now between 1.3100/1.3130 as we look at intraday rebounds increasingly as a chance to sell for a test of 1.2980. Beyond any breakdown, support is initially at 1.2910/1.2940.
A broad risk positive bias (which drove Treasury yields higher) meant that Dollar/Yen was strong yesterday. This has now driven a two week closing high and the market above 106.00. It means that the 106.00/106.60 resistance band is now being breached this morning to generate traction in the technical rally. A close above 106.60 would be a strong signal that the bulls are really gaining confidence for a recovery. Yesterday seemed to be a session in which sentiment shifted. Looking at the momentum indicators there is a real prospect of a recovery gathering pace now. RSI is rising into the 50s and Stochastics rising off a “bull kiss”, whilst MACD lines are also accelerating off a cross higher. A close above 106.60 would open 107.50 as the next resistance, which would be the test for a real game changer. For now this is still just an unwind into resistance, but if 107.50 can be breached as a lower high, then the whole trend set up would have changed. How the market responds to 106.45 (breakout above last week’s high) will also now become a key near term gauge. A break back under 106.00 would be disappointing now, with support at 105.30 becoming a key higher low.
We have been discussing the prospect of a near term gold correction, but the aggressive nature of the pullback has been something to behold. You take the stairs up but the elevator back down! Losing -$115 on the day yesterday is a mammoth sell-off, and it is continuing today. We have been talking about the support of the two month uptrend (today at $1867) being an eventual pullback area, but never imagined it would get there so fast. Momentum indicators have gone into sharp reversal, with RSI back under 50, along with crosses on MACD and Stochastics. The aggressive sell-off could mean that the next real price support at $1789/$1818 comes into play. This has been a fast moving market, and we would prefer to let the dust settle somewhat now. Our view remains that gold is a buy into supported weakness, but the support part of that is now crucial. Catching a falling knife is a dangerous game, especially when the floodgates of selling have been opened. Contrarians will already be eyeing a slowing of selling momentum overnight and a pick up of $40 from the early low at $1863 is coming through. Initial resistance is $1929 (an overnight lower high) and $1940 (an old consolidation range low).
Brent Crude Oil
Anyone who has been trading (or following) Brent Crude in recent weeks will know how frustrating a period is has been to be bullish. Every time it looks as though the market is ready for a breakout, an intraday slip into the close just pulls the reins once more. The market looked to be pushing on again yesterday, but a slip back into the close formed a negative candle and another failure to “close” the gap at $45.20. Finally closing the big bear gap of the key March sell-off remains elusive for the bulls as the rally wheels spins again. Despite all this, we continue to view near term weakness on oil as a chance to buy. The bulls will be looking for $44.25 support to hold but another higher low in the $42.90/$44.90 range will maintain the bullish bias. A move below $41.30 would be the move to see the bulls lose control. Resistance is mounting at $45.80/$46.25 which needs to be overcome to open the way towards the next real resistance at $53.10/$53.80.
Dow Jones Industrial Average
A run of seven positive closes on the Dow came to a halt yesterday as the bulls faltered into the close last night. Breaking out above 27,580 was a key near term move, but a pullback now threatens. This breakout is now an initial basis of support, but the bulls will now be looking to find the next higher low anywhere between 27,070 and 27,580 (the old highs from July and June respectively). Momentum is strong, but just tailing off now and this could usher a near term slip back in which would be the source of the next opportunity to buy. The hourly chart shows how the selling pressure accelerated into the close (never a great sign for the bulls) and which will leave a negative bias coming into today’s session (futures are broadly flat this morning). The bulls would not want to lose support at 26,610 whilst support of the higher low around 26,000 is now key. Yesterday’s high at 28,155 is the initial resistance now restricting the market in front of the bear gap at 28,400/28,890.