Market Overview
Equities have stormed higher in this risk recovery, with the promise of ever more supportive major central banks and the hugely better than expected US jobs report to fuel the optimism. However, with so much good news now priced in, there are signs of a pause in the risk rally. Whisper it quietly, but could a pause even turn corrective. I know it sounds incredible to think it, but risk markets can go down as well as up. There are signs of a near term retracement in bond yields and also threatening to take hold on forex markets. Although this is yet to filter into equities, with markets so overbought the risk of a correction is growing. US Treasury yields are falling back. A “bull flattener” of the yield curve (where longer dated yields fall quicker than shorter dated ones) is a retracement of last weeks “bear steepener”. It is a risk negative move. In the past 24 hours we have seen the yen in recovery mode, whilst the US dollar is performing well too today, especially against the commodity currencies. These moves need to have the context that the are turning back from multi month highs (on AUD, NZD and EUR) versus the dollar. However, as the FOMC begins its two day meeting, the dollar sell-off has at least for now been curbed. The question is whether this stalling of risk appetite on forex markets begins to lead to profit-taking on the equities bull run?
Wall Street closed strongly higher again, with the S&P 500 cash index recovery now meaning the index is higher for the year, at +1.2% and 3232. US futures are just off the top slightly this morning with the E-mini S&Ps -0.2%. We have seen mixed moves in Asia, with the Nikkei -0.4% (with a nod towards the stronger yen) and Shanghai Composite +0.4%. In Europe there are mixed moves too, with FTSE futures -0.1% and DAX futures +0.2%. In forex, the risk negative and dollar support is showing, with JPY being the main outperformer, whilst USD is outperforming the rest. A slide back on AUD and NZD is also a feature. In commodities we see gold consolidating but silver back lower again by -1.5%. After yesterday’s pullback, the early moves today are seeing oil supported by around +1%.
Once more it is a fairly quiet economic calendar today. The European morning will have traders eyeing the Eurozone revised Q1 GDP at 100BST. This is the third reading of first quarter growth and is expected to be unrevised from the -3.8% GDP QoQ decline of the second reading (after Q4 2019 was +0.1%). Into the US session, the US JOLTS jobs openings for April is at 1500BST and is expected to show a decline of -13% to 5.375m (from 6.191m in March).
Chart of the Day – EUR/JPY
We have been discussing the bull run on the euro for several days now. In the wake of the ECB move, we have seen an exhaustion signal, and a rare three day candlestick pattern. An “evening doji star” set up is a reversal signal, and a good one at that. A strong bull candle (in the wake of the ECB), a doji candlestick (with a blow off bull failure), followed by a third strong negative candle yesterday. Add into the mix, Friday’s session was entirely outside some very wide Bollinger Bands, with Monday’s session closing back decisively inside. Again, this is a Bollinger Bands exhaustion signal. Momentum indicators are now posting profit-taking signals (although nothing is confirmed yet). The daily RSI falling back under 70 (from above 80) is a basic sell signal as are the Stochastics crossing lower (although not yet a confirmed signal). Closing yesterday’s session back under the support of the old breakout band 122.85 (January high) and 123.35 (old July 2019 high), could now usher in a correction back towards 121.00/121.40 again as the market retraces back towards the trend support (today c. 119.80). The hourly chart shows how hourly RSI went below 30 for the first time in three weeks yesterday, whilst MACD lines have turned negative. Closing under yesterday’s low of 122.55 for a second successive negative session would add corrective momentum. The bulls need to quickly get back their control with a close back above 123.35/123.60 initial resistance.
Following the potential exhaustion of the euro rally post-ECB and the payrolls report which helped the dollar to rebound slightly, we still find EUR/USD at an intriguing crossroads. Friday’s strong negative candle threatened to usher in at least some near term profit-taking, but in a mixed session yesterday, the bulls held ground. Nonetheless, the very small bodied candle does signify uncertainty and this could be enough to still encourage some profit-taking. The lack of conviction early today suggests the market is still at that crossroads. The sharp uptrend of the past two weeks has been broken and momentum indicators are just beginning to wane {now. The daily Stochastics are the first to cross lower (although no confirmed sell signal yet. The RSI falling back below 70 would also be a corrective signal. The early warning signals are beginning to slip below recent levels where support has previously formed. Hourly RSI went below 40 yesterday whilst hourly MACD lines have gone below neutral and are at two week lows. Support to watch initially is the breakout of $1.1255 and a breach would begin to see the market losing trend momentum. A move below $1.1180 would open for a deeper correction. Initial resistance is $1.1320/$1.1345 for the bulls to get back on track to retest the $1.1385 rebound high.
It was a relatively quiet session yesterday, but with another solid positive candlestick, the Cable bulls are still in control of the recovery. We talked previously about our concerns that the move higher may begin to come under corrective pressure, but for now the bulls are standing tall. The strength of momentum remains impressive with daily RSI in the high 60s, whilst Stochastics are strongly configured and MACD lines rise above neutral. Clearing the old resistance of $1.2645 for a second day is a positive signal too and this now needs to be the basis of support for the bulls. There is a slight pause in the move this morning and there is just a slight tailing off of the hourly momentum signals. The bulls need to focus on holding above an eight day uptrend (shown on the hourly chart around $1.2660 this morning and the 89 hourly moving average which is flanking the run higher around $1.2640. The initial support at $1.2625 holding intact is key for the continued run higher too. If all these conditions still hold, then the recovery has the capacity to continue. Closing decisively above $1.2725 (an old February low) would mean the next real resistance level is not until $1.3200.
After weeks of underperformance, suddenly we are seeing a resurgence on the yen. For the Dollar/Yen pair, the corrective force of yesterday’s strong bear candle has really come to bite the outlook for the recovery. It has driven a strong retracement of last week’s bull run and the move is continuing today. The positive outlook is back to a key level now. It took weeks for Dollar/Yen to breakout above 108.10 and if the market pays this level (which should now be considered a level of underlying demand and support) little or no regard on a pullback, it would be a worrying signal for the bulls. The hourly chart shows the support in the band 107.90/108.10 is an important gauge today. A breach would open for a deeper correction towards 107.05/107.40. Resistance is also now in place at 108.40/108.60 as a barrier for renewed gains too. The bulls will need to very quickly regain control otherwise we could be talking about 106/107 once more.
Today’s session could be a very important one. Price action has turned the positive outlook sour in recent weeks. The dominance of strong negative candlesticks is overpowering the attempted recoveries. This is reflected in the consistent failing of momentum as daily RSI, MACD and Stochastics track a path lower. Yesterday’s latest rebound brings the market to another near term crossroads. Since topping out at $1764, the rebound candlesticks have been treated as another chance to sell as the market sets towards a test of the medium term range lows $1660/$1670. Will this latest bounce be once more treated as another selling opportunity? The signals look worrying on the hourly chart this morning. The hourly RSI is again faltering around the 60 level, whilst Stochastics are already pulling lower and MACD lines are threatening another bear cross around neutral. The bulls need to climb above the resistance band $1720/$1725 to start to change this outlook of selling into strength, however, the market now seems to be faltering around $1700 (where previously this was seen as a basis of support). Back under $1685 today would really put pressure back on $1670 support.
The bulls have just had the reins pulled on their strong run higher in the past 24 hours. Having turned back from $43.40 (the gap at $45.20 is still open), a decisive negative candlestick formation gives pause for thought now. Yesterday, we discussed how the bull run was strong but overbought, and how the bull runs higher in this recovery were often subjected then to a phase of consolidation. The uptrend which flanks this recovery comes in at $38.70 and the market is consolidating early today. The momentum indicators just tailing off is still more likely to represent a pause in the bull run rather than the early signs of a corrective move, however, they need to be watched. RSI diving below 60 and Stochastics diving below 80 along with a MACD bear cross would suggest taking a step back from this current bull run. We remain bullish on the recovery on oil on a medium term basis, and the support of the neckline breakout (a strong band is $33.55/$36.40). We would see a near term unwind towards here as a great opportunity to buy with a big base pattern implying around $56 in the coming months.
It is difficult to come up with new things to say about this massive Wall Street rally. The Dow just keeps on going on its merry way higher and the bullish candles keep being racked up. Media is all talk of Wall Street erasing losses for the year, but the Dow is still around 970 ticks under where it closed at the end of 2019. So there is more to go on that front. The daily momentum continues to strengthen, with RSI into the mid-70s, whilst MACD lines accelerate to levels above neutral that have never been seen before (not least on our charts). This is a bull run that it is unwise to get in the way of. Although there are beginning to be signals elsewhere in financial markets that way eventually drag on the Dow, right now, the only caveat that can be levelled at the Dow is that it is overbought. There have been two sessions this week where the price action has taken place almost entirely above the expanding Bollinger Bands (although the bands are not excessively wide right now and this could hamper the immediate move higher. The support of a three week uptrend comes in at 26,300 today. Yesterday’s traded low at 27,230 is the initial support. Next upside barrier is an old January low of 28,170 before we get into the realm of the all time highs again.
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