ANALYSIS DAY 6 MARCH #2017
There is a mildly corrective sentiment forming on markets early this week in reaction to hawkish comments from Janet Yellen and concern over North Korean missile tests. The market has been all but told by Fed chair Janet Yellen that a rate hike is coming in March. If the data continues as expected then there seems to be little doubt that the Fed will now not hike in March. Fed Funds futures remain well above the 70% area generally considered to be the point at which the Fed is happy that the market is fully prepared for a hike, and there is little suggestion that the Fed will not proceed in the meeting next week. However, markets have taken a little breather from the dollar strength in the moves sine Yellen’s speech. Treasury yields have retraced, with the 2 year yield pulling back from a multi-year high at 1.345% to the 1.3045. Safe haven plays are also in focus today with North Korean testing missiles into waters close to Japan, seen as a provocative act. This is all starting the week on a bit of a corrective footing, with equities mildly lower. However these moves are still likely to be near term in direction as the stronger dollar is likely to resume in due course.
Wall Street closed with the mildest of gains with the S&P 500 +0.1% at 2383, whilst Asian markets were mixed to lower overnight (Nikkei -0.5%). European markets are also slightly weaker in early moves. The forex markets show safe haven positioning with the dollar clawing back some mild gains across the majors other than the yen which is outperforming. Gold and silver seem to be resuming their track lower, whilst oil is also pulling lower again.
There is a fairly quiet start to the week on the economic calendar with little other than US Factory Orders for traders to be concerned with. The data at 1500GMT is expected to show that orders grew by +1.1% on the month which would maintain the year on year data around 18 month highs of 3.7% growth.
Chart of the Day – AUD/USD
The Aussie had been holding up admirably in the face the recent return of dollar strength (all whilst the Kiwi has been coming under increased selling pressure), however the support finally gave way on Thursday and could now begin to follow its antipodean counterpart lower. Thursday’s sharp sell-off was the biggest once day decline on the pair since 9th November and dragged the Aussie below key support at $0.7600. Despite a small retracement rebound on Friday, the outlook is still impacted by the legacy of Thursday’s big bear move. This comes ahead of the Reserve Bank of Australia monetary policy decision on Tuesday morning UK time which could now be questioning the likelihood of a positive reaction to a more neutral RBA. The technicals show the market turning increasingly corrective now with the RSI below 50 whilst the Stochastics and MACD lines are accelerating lower. The $0.7600 old support is now a basis of new resistance whilst there will now be a near term “sell-zone” between $0.7600/$0.7645. A move below the reaction low support around $0.7500 which is another key medium term pivot and would open further retracement and one that would turn the outlook far more corrective.
The euro has rallied sharply to confirm a break of the four week downtrend. A big bull candle added 115 pips into the close and now has the potential to change the outlook. A sequence of lower highs that has formed in the past few weeks is now under pressure. The resistance at $1.0630 is now well within range this morning. The early move has been for a mild dip back but the threat is still there. The momentum indicators are also now at an interesting crossroads, with the RSI up at 50, the MACD lines close to crossing higher and the Stochastics also ticking higher. The 21 day moving average (currently $1.0607) has also been a strong gauge in recent weeks and is being tested. The hourly chart though shows that the market really took off in the wake of Janet Yellen’s comments on Friday night, but is just losing impetus in the rally as hourly indicators roll over. The old support around $1.0575 will become a level to watch near term, as a breach would begin to regenerate the bears again. There is further minor support at $1.0540. Above $1.0630 re-opens $1.0680/$1.0710.
The recovery off the low of $1.2212 on Friday has formed a small bull hammer candlestick pattern and opens the potential for a near term recovery. This is the first positive candle in well over a week but needs to be followed today by further gains. This is because, being less than 90 pips of daily range means that the bull hammer does not have a significant magnitude and the momentum indicators are barely registering a recovery either. There needs to be more to suggest the bulls are ready to bounce. Even then, there is a significant area of overhead supply between $1.2345/$1.2380 that is likely to contain a rally. Cable subsequently remains a sell into strength and looking at the hourly chart we can already see the impetus leaving the rally as the hourly momentum rolls over this morning. Resistance is initially at $1.2300 today, and if the bulls struggle this morning, the little bounce is likely to be shown as a chance to sell for a retest of the lows again.
As is so often that seems to be the case with Dollar/Yen now, a few days of gains are being followed by a retracement move. The medium term range remains in play and the conviction in the move is quickly receding. A degree of dollar profit-taking has set in and this is pulling the par lower, whilst the safe haven status is helping the yen today (from the North Korean missile tests). Friday’s bear candle was not a huge turnaround, but the hourly chart shows more of a corrective outlook now. The market is back below the 114.00 pivot which has completed a small 75 pip top pattern and implies 113.25, whilst the hourly MACD and RSI is more corrective. A move below 113.45 which is a higher reaction low would increase the corrective outlook near term. There is further support at 112.75. Resistance is now at 114.13 initially today.
Gold has been trending higher since the middle of December, but on Friday there was a significant break of the trend. Although the market did not close below the uptrend, the outlook has changed and the bulls have lost control of the medium term moves. With a decisive break of the 21 day moving average (currently $1238) and the momentum indicators gaining corrective traction the bulls have lost control. However Friday’s bounce into the close formed a candlestick that is in effect a “long legged doji” which reflects uncertainty with a sell-off. Failing to close below the $1225.70 support is another mixed signal. I am now turning neutral for the medium term outlook but this would turn bearish on a close below the $1220 old key breakout. The hourly chart shows a near term downtrend is still pulling the market lower and rallies are being sold into. Resistance is at $1236.80 initially today, with $1250.60 key.
Although the recent run of bearish candles came to an end with a small rebound on Friday, the bulls will have gained little real confidence. The momentum indicators reflect a mixed outlook medium term, but suggest a near term negative pressure still. The market continues in its multi month $5 trading range but there is a series of higher lows that are linked by a mild trend higher since December. This may give rise to a bounce again early this week, but there is a consistent failure for any side to gain a sustainable grip on the market as rallies continue to fail underneath the range resistance. A lower high at $54.45 is the first real resistance with support at $52.60 however this is a classic range riddled with false moves and uncertainty. This drives a very short term trading horizon at best. The rally from Friday is struggling at $53.40 this morning and is providing the first resistance, whilst $52.55 is supportive.
Dow Jones Industrial Average
The prospect of an unwinding correction back to fill the gap at 20,840 remains high, however corrective moves are still likely to be bought into. The Dow posted a neutral candle following the sharp bear candle of Thursday and the momentum from the big bull move is losing its impetus. A retreat to fill the gap is an increasing likelihood now, however with a band of support 20,735/20,850 in place for initial support, there is little real prospect of a significant corrective move. The trend has been so strong on the Dow that every time the market threatens a correction, it ends up being supported and turns into a consolidation that gets bought into. There is minor resistance at 21,040 from Friday’s high but the main level to watch for now is the key high at 21,169.