Is an early risk rebound just a chance to sell?

Market Overview

The corrective momentum on the US dollar has dissipated for now as the greenback has regained its safe haven flow. This will now be an interesting test of market outlook. Has the dollar unwound to be a buying opportunity again? Although there is no one event that has driven the shift in sentiment, the selling pressure that is ramping up across Wall Street will certainly have had a part to play in this. This has come as the megacap FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) have fallen into bear market territory, reportedly feeling the pinch of the trade tensions between the US and China. Political risk in Europe is still bubbling under the surface and could once more boil over today as the European Commission is set to respond to Italy’s latest flagrant disregard of EU budget rules. If the commission begins the process of “excessive debt procedure” then there could be renewed selling pressure through the euro (which would also help the dollar to regain further ground). The renewed sell-off on oil has certainly not helped risk appetite either and there is an increase in market volatility to contend with. This comes as traders contemplate how to position ahead of the low volume/low liquidity period for Thanksgiving. However, this morning we see a marginal recovery in risk appetite, perhaps helped by an early rebound on oil following a surprise inventory drawdown at the American Petroleum Institute, whilst US futures are also higher. However, there is little to suggest any recovery in sentiment will be sustainable at this stage.

Wall Street was smashed again last night, with the Dow losing over 500 ticks (-2.2%) whilst the S&P 500 was off -1.8% at 2642. Wall Street futures have rebounded by around +0.5% early today and this is helping a mixed session in Asia (Nikkei -0.3%, Shanghai Composite +0.2%), whilst European markets are also tentatively higher. The concern is that initial rebounds in recent sessions have been used as a chance to sell. In forex, there is a rebound on the euro and sterling, whilst it is interesting to see the Aussie and Kiwi performing well initially. In commodities, the consolidation on gold continues, whilst oil has rebounded over a percent higher as it looks to regain its poise after a huge sell-off yesterday.

In a quiet week for economic announcements, with Thanks giving meaning the US markets are closed on Thursday there is a bulk of announcements being made today. First of all the UK’s Public Sector Bet Borrowing data for October is at 0930GMT. Consensus is expecting borrowing of +£5.4bn (which would be slightly higher than September’s +£3.3bn but on a comparison to October 2017 the borrowing would be lower than the +£7.2bn recorded 12 months ago. The key release of the day out of the US comes with Durable Goods Orders (core, ex-transport) at 1330GMT which are expected to grow by +0.4% on the month in October (+0.1% in September). Weekly Jobless Claims are at 1330GMT and are expected to remain around their record lows at 215,000 (216,000 last week). Existing Home Sales are at 1500GMT and are expected to grow by 1.0% in October to 5.20m (from 5.15m in September), whilst the final reading of the University of Michigan Sentiment is also at 1500GMT and is expected to be confirmed at 98.3 (from the prelim reading 98.3, but down from the final 98.6 last month). EIA oil inventories at 1530GMT continue to have an impact on the oil price, with crude stocks expected to build yet again (would be a ninth consecutive week of build) at +3.0m barrels after last week’s huge +10.3m barrels build. Distillates are expected to drawdown by -2.8m barrels (-3.6m barrels last week) with gasoline stock with a slight build of +0.1m (-1.4m last week).

Chart of the Day – French CAC 40

The selling pressure has been ramping up through European equities in recent days as the late October technical rally has petered out. On the CAC 40, there was an old support band 4995/5051 which had been tested in recent sessions, but yesterday’s close below seemed to open the flood gates for a test of the crucial October low at 4896. An intraday move to 4896 could not be held into the close but the market is positioning for a decisive downside break now. This is due to the momentum indicators which have turned increasingly negative with Stochastics and RSI accelerating lower (but also with further downside potential) and also the MACD lines now completing a bear cross lower. Yesterday’s close at 4925 was already the lowest close since March 2017 and effectively confirms a huge 20 month top, but a closing breach of 4896 would confirm the significant bearish implications of the move. There is a gap open at 4980, which theoretically needs to be filled, but any rallies should be seen as a chance to sell now. The market is around half a percent higher this morning, but is this just another opportunity for the bears? The next support below 4894/4896 is at 4806.

EUR/USD

The near term breakout has been dealt a sizable blow, as yesterday’s corrective move ended up forming a “bearish engulfing” candlestick pattern (key one day reversal). This can be a powerful one day pattern and now means that today’s session is key. Another negative candle would confirm the corrective move and the dollar bulls would certainly gain in confidence. The resistance at $1.1470 from yesterday’s high is now key too. Momentum which had been improving is suddenly looking less positive as the Stochastics lose their impetus and threaten to cross lower, whilst the MACD and RSI are also looking less positive suddenly. A close below yesterday’s low of $1.1355 would increase the downside pressure. The hourly chart shows the bulls have lost their control, but there is support $1.1270/$1.1370. Initial resistance is at $1.1390.

GBP/USD

In the past few sessions since Thursday’s hugely volatile bear candle, the market has been relatively stable. Yesterday’s negative candle threatens to find renewed downside traction, but as yet there is a relatively conserved market as the European session takes over. However, whilst the near term outlook on Cable remains uncertain, looking further out there is still a near to medium term bearish drift where rallies are being sold into. This comes with momentum indicators all collectively tracking lower. Monday’s high around $1.2885 (which is also pivot on the hourly chart) now threatens to be another lower high, whilst pressure seems to be mounting for a retest of the near term low at $1.2720 and then on to the key medium term lows $1.2660/$1.2695.

USD/JPY

The dollar correction found a degree of consolidation yesterday as the market formed a mildly positive candle in a move that was the first real gain for USD/JPY in about eight sessions. However, it is too early to say whether this is the end of the unwinding move as there is a risk of further correction with the momentum indicators negatively configured as the RSI, Stochastics and MACD lines continuing lower. Despite this though, on a medium term basis, the current correction is still counter to the bigger six month uptrend and would still be considered to be a buying opportunity at some stage. How the market reacts in the next couple of sessions could be key and initially today there are tentative gains. Initial support is 112.30, whilst there is still pivot resistance 112.90/113.10. The 89 day moving average at 112.11 has been a key basis of support for corrections over the past few months, with the six month uptrend coming in around 111.95 today.

Gold

With the dollar regaining some near term performance yesterday there was a slight stalling of the recent gold rally. This now leads to a key moment for the bulls. Will the support band $1208/$1217 now be seen as a near term buy zone? If there is a drop into the band that can form support and then rally again, this would be a key sign that the gold bulls are increasingly in control of this market. The improvement in the momentum indicators has though started to tail off and suggests that although the market remains positive, there is a question mark over the outlook. The reaction to the pivot band $1208/$1217 will be key. Furthermore, the dollar will still play a key part in the direction of gold on a near term basis and therefore needs to be watched. The key support on gold is now at $1195. Initial resistance building at $1226.

WTI Oil

Candlestick analysis of recent sessions on oil has been telling us that the bulls have been incredibly tentative in the recent rebound and this has culminated in another huge sell-off on WTI. Yesterday’s candle opened higher on the day but got smashed into the close, falling almost 6% on the day and plummeting through the recent support at $54.75 for another 12 month low. The next key support is the October 2017 low at $49.10. This is a market that is clearly very nervous of any negative signal. Overnight, the market has started to rebound again to leave initial support at $52.75. API inventories showed a surprise crude stocks drawdown which will put focus now on today’s EIA inventories. However, any rebound will now find significant resistance of overhead supply at $54.75 up towards $58.00.

Dow Jones Industrial Average

Huge selling pressure has once more taken over Wall Street. A second enormously bearish session has seen the market gap lower to form a bearish candle and break through a primary uptrend that dates back to February 2016. This is now a market at risk of testing the key October low at 24,122 and given the deterioration in momentum, has the downside potential to breach it. The Stochastics and RSI are now tracking decisively lower, suggesting that any intraday rallies will struggle, whilst the MACD lines have bearishly crossed lower below neutral. There is a gap still open at 24,900 which still needs filling, whilst the recent two week downtrend is up at 25,225. However the bulls will find it very difficult to gain a meaningful footing in this market now. Initial resistance is at 24,800 meaning 24,800/24,900 is a key sell-zone now.