Market Overview
There still seems to be a fine balance struck between whether markets lean positive or negative on any given session. Sentiment fluctuates between bullish and bearish. Hopes for vaccine and treatment drugs are still able to boost sentiment, but the traction seems to be limited now. The weight of concern comes with the economic impact on the US economy from rising COVID-19 infection rates. Consistently over 60,000 new cases per day, is driving the need to reverse re-opening measures. The state of California closing bars, restaurants and other businesses is a concern for retail sales recovery and consumer confidence. The data for July and as Q3 develops is likely to reflect this and scale back expectations of economic recovery. Add in a dose of concern over the tit-for tat relations between the US and China over Hong Kong, interests in the South China Sea and Huawei. The risk recovery has been built for perfection and with reinfections growing in the US, it seems that a China recovery needs to be a heavy lifter for the global economy again. China trade data out overnight has been encouraging, but Singapore reported a larger than expected decline in Q2 GDP and a move into recession for the first time since 2009. UK GDP for May has also disappointed, a data miss driven by underperformance by the dominant services sector. Any good news on the economic data front that markets were served in the past month, seems to be running dry. At the least, this makes it much harder for the risk rally in the weeks ahead.
Wall Street fell sharply into the close, weighed down by a drop in tech stocks, with the S&P 500 -0.9% at 3155. Even though US futures have rebounded slightly today (E-mini S&Ps +0.5%) there has been pressure through Asian markets, with Nikkei -0.9% and Shanghai Composite -0.9%. In forex, there is a mixed look to major pairs, with little real theme, however, with US Treasury yields lower this should suggest a weight on risk appetite. In commodities, gold and silver have slipped slightly in early moves, whilst oil is around -1% lower.
It seems a while since there was any data of note but given the data releases earlier and also due later, the economic calendar has a pretty steady stream of data today. The German ZEW Economic Sentiment at 1000BST is expected to slip back slightly in July, back to 60.0 (from 63.4 in June). This deterioration comes despite a continued pick up in the ZEW current conditions component which is expected to recover further in July to -65.0 (from -83.1 in June). The big focus for today will come with US consumer inflation for June, with the US CPI at 1330BST. Headline CPI is expected to improve by +0.5% in the month of June which would improve the year on year reading to +0.6% (from +0.1% in May). Core CPI is forecast to improve by +0.1% but the year on year inflation would be dropping to +1.1% (from +1.2% in June).
Keep an eye out for the FOMC’s Lael Brainard (voter, leans dovish) who is speaking at 1900BST today.
Chart of the Day – German DAX
The DAX is still positing higher lows and we would love to be able to fully back the rally. However, almost every session is a hard grind for the bulls. In the past three weeks, the number of negatively configured candles (with a close below the open) have outweighed the positive candles. This suggests that the DAX rally is reacting off other markets (mostly Wall Street) whilst it is a real struggle for any sustained traction. This is effectively reflected in the MACD lines which have been drifting lower for the past month and lack conviction in the bullish outlook. Despite this though, the old gap from 12,470 has now become a pivot and good basis of support, whilst the market has used the support of a six week uptrend (today at 12,520) to squeeze the market for a test of the key 12,915 resistance. With futures pointing to the market sharply lower in early moves today, these supports look set to be tested again. The response of the bulls could be key. So we look at the uptrend (12,520) and the pivot (at 12,470) as key near term indicators. How the DAX reacts to these levels in the next couple of days will give a strong indication as to whether 12,915 resistance can be tested. The daily RSI is still low 50s to low 60s and Stochastics positively configured to suggest buying into weakness is still the strategy. A close below last week’s low at 12,415 would signal real strain to the bullish outlook.
The euro bulls continue to test the multi-week resistance between $1.1350/$1.1375 which has acted as a limit to their attempts to get real control on this market. There is an appetite to buy into weakness that means EUR/USD is pressuring higher, however, there needs to be a release of the shackles to truly back a bull run. Momentum indicators look primed and ready, with the Stochastics and RSI swinging higher in a positive bias, whilst MACD lines have converged above neutral, potentially ahead of a bull cross. Yesterday’s close of $1.1340 was the highest close for a month and adds further evidence that the bulls are ready. We look to buy into supported weakness. Support at $1.1255 needs to hold, but the bulls will want to build above $1.1300 now (shown on the hourly chart as a near term pivot). A close above $1.1375 would confirm the bulls in control to test $1.1420 and then the crucial $1.1490 March high comes into play.
Sterling bulls have lost their way somewhat in the past few sessions. Two small bodied candles (reflecting a lack of conviction) have been followed up by a decisive negative candle as Cable was sold off into the close last night. The neckline breakout of the support at $1.2540 is now under threat. There is now a direct conflict of the weight of the 7 month downtrend (which is falling today at $1.2685) and the near term (base pattern). The bulls need to return quickly today to prevent this base pattern from losing its bullish influence. A decisive close under $1.2540 would suggest that the recovery momentum has been lost and a retreat and once more neutralised medium term outlook become preferred. This would be increased were there to be a move below $1.2435 reaction low. Already we see momentum threatening lower. The Stochastics are the main concern, bear crossing after a bull run, in a similar configuration to the failure of the early June rally. It would appear that the medium term range has further to go yet. The importance of resistance at $1.2670 is mounting.
In yesterday’s analysis we discussed the potential for a near term rebound from the medium term support area between 106/107. With so many retreats into this band over recent months, time and again finding willing buyers, it was interesting to see once more this coming through in yesterday’s session. The strong positive candle that built throughout the session has subsequently retraced the negative implications of Friday’s sell-off and builds the potential for a near term recovery now. The first test if a little two week downtrend (today at 107.35) which needs to be broken. In such a tight consolidation, trendlines mean little and will often be broken. However, they can imply subtle shifts in sentiment. Daily momentum is mixed (Stochastics falling, RSI rising and MACD flat), but an improvement is being seen across the hourly indicators. A new run of higher lows and higher highs, whilst the hourly RSI moved above 70 for the first time in two weeks, and good near term support is forming at 106.95/107.10. A move above 107.40 would open the next line of resistance at 107.75 but also swing the market into a confirmed new phase of recovery within the medium term range.
Gold continues to consolidate the latest breakout to new multi-year highs. We have backed the gold run higher, and so far we continue to do so. However, with a balance of small bodied and mild negative candlesticks in recent sessions, there is a sense that there is a little caution creeping in. Technically the set up is still bullish, as momentum indicators remains positively configured with RSI and Stochastics holding in strong positions. The support of a five week uptrend which is still intact and comes in today at $1792 (which is above the $1789 latest breakout) will become a key early warning sign now. A breach of this trend could begin to reflect a near term tiring of the move higher and potential correction. Moving under $1789 would add to this potential. However, we would still view weakness as another chance to buy into what is still a very strong medium to longer term bull trend. Any corrective move that finds support between $1789 and $1764 would be another good chance to buy. We still expect $1818 will not be a key high for long, as the two month consolidation range breakout implies a target range of $1820/$1858. Given the bull market outlook, we would expect a good chunk of this implied target to be achieved in the coming weeks. A move below $1744 would be our signal to shift from our bullish stance and turn neutral now.
Price action over the past week on Brent Crude has shown how the emphasis of who is in control of the market has shifted. Previously, throughout June into July, although the upside impetus was waning, the bulls still had control in the market. After repeated failures to breakout above $43.95, the bulls seem to have been neutralised at best. Friday’s rebound candle was once more sold into yesterday and there is an early slip lower once more today. Although the shallow eight week uptrend was broken last week, there is nothing overtly negative yet, and this could still just be part of a consolidation. However, Friday’s support at $41.30 needs to be watched, as a breach would just begin to form a more corrective outlook, near term. Support at $39.50 is still more important, but with momentum indicators all tailing lower now, there is a threat that the bull run since March is increasingly mature.
For the trading outlook on the Dow, our focus in recent weeks has been on the resistance band 26,300/26,610 and the key downside gap at 26,940. Yesterday’s bull failure at 26,640 which formed a “shooting star” candlestick set up, is now a concern for the bulls. A shooting star tends to be most indicative of a reversal after a trend higher, and its effectiveness in a range can be limited. However, the pattern coming on an attempted break above resistance, but which also failed to “close” a gap, really does steer at another potential swing lower. There is nothing too negative yet on momentum, but the Stochastics are beginning to threaten a rolling over. Futures are flat early today. However, if the hourly chart is anything to go by, the selling pressure was mounting into the close last night and the corrective signals are mounting again. Support at 25,525 needs to hold otherwise a retreat to the key range lows will set in again, with 24,765/24,970 as the floor.
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