Market Calm Follows Yesterday's Reversal: Will It Last?
Hantec Markets | May 16, 2014 08:30
Markets had a huge reversal of sentiment yesterday as disappointing growth numbers in Europe was followed by a weaker than expected housing market index in the US. Positive weekly jobless numbers could not prevent a big turnaround for equities and bond yields both of which were sharply lower in the afternoon.
The declines on Wall Street followed through into Asia trading which saw the Nikkei coming under further pressure as the safe haven yen continued to benefit. European trading is showing a little support coming in, but after the fear generated from yesterday’s slide it will be interesting to see if this lasts.
In forex trading, the dollar pared earlier gains as aggressive flattening of the yield curve saw US 30 YR T-Bond fall 1%. Today’s trading sees the US Dollar Index largely flat with little movement yet on any of the major pairs. Today's news of LTRO repayment could impact on the strength of the Euro. If news of more than expected this would help support the single currency.
There is more housing data for the US today. After yesterday’s weak housing index report, the dollar could come under further pressure if this is also reflected in today’s building permits and housing starts, at 13:30 BST. Traders will also be looking out for the University of Michigan Consumer Sentiment, which is expected to continue to improve to 84.5 (from 84.1) at 14:55BST.
Chart of the Day – DAX/h3
I could have chosen any one of the major European indices, however the fact that the DAX hit an intraday all-time high, only to post a huge bearish key one day reversal is now a significant concern for the medium term prospects of this bull run. The strength of this intraday turnaround was significant, and the fact that it came amid a breakout to a new all-time high only adds to the concern.
The DAX has now left key resistance at 9810, and also posted a sell signal on the Stochastics (although tis has not been confirmed by a fall back below 80 yet for the momentum indicator). The intraday hourly chart shows the first band of support between 9630/0645 is holding and signs are that this may continue today. However should a rally now fall over under the resistance at 9709 then the pressure will increase once more for a correction.
The significant near term support comes in around 9400. It would now need a move to another new all-time high above 9810 to negate the corrective influence of the bearish key one day reversal.
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The Euro continues to teeter on the brink of a significant downside break. Yesterday saw EUR/USD post a new 10 week low intraday only for a recovery back above the 144 day moving average which has for the past nine months acted as the basis of major support. This means that after sharp correction of the last six days, the bulls have got to fight to prevent this move turning into a major sell-off. Daily momentum indicators remain corrective and this move could easily be merely a pause for breath as the selling pressure has been quite severe recently.
On the hourly chart there is little evidence to suggest that this rally will not be sold into. There is resistance $1.3730/40 which is capping the gains and there would need to be a move above $1.3774 to suggest a near term recovery might continue. Hourly momentum indicators have already unwound and are turning lower and this just looks to be another chance to sell.
Despite the correction, the outlook on GBP/USD is significantly better than for the Euro. Looked at on a medium to longer term perspective, the decline as merely unwound the rate back to the support of an uptrend that has been in place since November. Daily momentum such as the RSI is back to levels where the buyers have supported within the uptrend and the MACD lines remain corrective within a bullish configuration. This makes the support at $1.6680 increasingly important.
The intraday hourly chart however shows us a far more corrective picture. A large two week top pattern is in place which completed below $1.6830 and implies a correction back towards $1.6660. There may have been a rally off $1.6729 yesterday but the move has just unwound an oversold position on the hourly momentum and around the falling 55 hour moving average looks to be a chance to sell. This intraday top pattern will continue to dominate the outlook near term until a breach of at least resistance at $1.6874.
A significant turn lower mid-session yesterday has heaped pressure back on the recent lows of USD/JPY once more. The daily moving averages do now seem to be providing resistance, significantly though the 144 day moving average is one of them, having been previously the basis of support it is now resistance at 102.32. Furthermore, of concern is that the shallow uptrend is also breaking down as a basis of support. The April low at 101.31 is under pressure and a breach would open the March low at 101.17 and then the crucial February low at 100.76.
The intraday hourly chart shows moving averages turning lower in bearish sequence, while momentum indicators suggest selling into strength. There is initial resistance at 101.70, with the pivot level around 102.00 still a gauge of who is in near term control.
The daily chart for Gold still shows a choppy, uncertain outlook which is supported by the 144 day moving average (at $1280.64) on the downside and capped by resistance with $1315.60 on the upside. Daily momentum remains largely neutral and gives us little indication. Once more, and intraday correction seems to have scuppered any chances of a sustained recovery. The price is again back below $1300 and is also below the hourly moving averages. However all is not lost.
As I pointed out yesterday, the intraday support at $1288.64 on the hourly chart remains intact and while this remains the case, the intraday picture will retain a slightly positive outlook. However, risk/reward is a big issue with gold at the moment, as the real support does not come in until $1279.60 and subsequently gold is trading around mid-range. Gold remains a difficult play.
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