Oil price jump boosts equities with dollar uncertain

Market Overview

A boost higher in the oil price has helped to give market sentiment another shot in the arm and has propelled Wall Street into new high ground. With the bi-annual OPEC meeting next week, the newsflow over the implementation on production cuts/freezes will ramp up.
Yesterday’s optimism over the production cut helped to pull oil sharply higher yesterday and the move has continued today. The move helped to pull the S&P 500 into all-time high ground yesterday, with the VIX Index back below 13 and its lowest since 7th October. It will be interesting now to see if this can filter through to other markets such as the DAX which has struggled for months around its key 10,800 resistance area.  With Treasury yields consolidating, there have been signs in the last day or so that the dollar run higher is struggling to maintain its impetus and there are key markets such as EUR/USD and USD/JPY that are looking susceptible to a retracement. The dollar has reacted positively today but the next move is uncertain, which could encourage profit-taking.

For equities, on Wall Street the S&P 500 was 0.8% higher at 2198, whilst Asian markets were also higher although the Nikkei was an underperformer (+0.3%) after reacting to an earthquake. European markets are strongly positive at the open following US markets higher.  In forex after a one day correction yesterday, the dollar is looking to claw back some of its losses today and is trading positively against most forex majors. In the more risk positive outlook today, the yen is the worst performing major currency. As the dollar has regained lost ground the overnight gains on gold have been clipped back however silver is managing to stay positive. Oil has held on yesterday’s gains and is just over a half a percent higher today.

Again there is a light economic calendar today. UK Public Sector Net Borrowing at 0930GMT could drive a little volatility on sterling if there is a significant surprise from the forecast £5.9bn of borrowing. Canadian Retail Sales at 1330GMT (+0.5% MoM for core exp) could impact on the Canadian Loonie. Eurozone Consumer Confidence at 1500GMT is expected   to improve only very marginally to -7.8. The main data point is US Existing Home Sales at 1500GMT (5.43m exp) whilst Richmond Fed Manufacturing Index is expected to improve above zero back to +1 (from -4 previously).

Chart of the Day – EUR/GBP

After a week of consolidation, sterling finally started to regain some strength again yesterday which means that EUR/GBP continues to track lower. A strong red candle has taken Euro/Sterling to a 9 week low and puts it back on course for a test of the September reaction low at £0.8330. The interesting feature of the daily chart is now the deterioration in the momentum. The RSI had been threatening to engage a rally last week, but this has turned back below 30, whilst the MACD lines are now falling in bearish configuration below zero and the Stochastics are also very negatively configured. This all points to further weakness. With the bearish engulfing one day candle, yesterday’s high at £0.8638 is now a key near term resistance and is another lower high below £0.8707 with the old key band of resistance £0.8725/£0.8815. The lower that the pair falls the more that the key July low of £0.8247 comes back into range. The hourly chart shows how £0.8560 has become a pivot in the past couple of weeks and intraday rallies towards there towards should be seen as a chance to sell.

EUR/USD

The euro has broken a sequence of ten consecutive bear candles with a gain of around 45 pips. The question now is whether this is the start of a technical rally. There are some early signs on the daily chart with the RSI ticking higher, however there needs to be further traction today with the RSI still below 30, whilst the Stochastics (which tends to be more reactive than the RSI) are barely showing any sign yet. The hourly chart shows a bottom could be forming with a minor higher low yesterday to leave support at $1.0575 however there has not been any real resistance breached yet. The initial resistance band is  $1.0663/$1.0710 and realistically this needs to overcome for any real traction to be developed. The hourly RSI is again finding difficulty in pushing above 60 however if the RSI can hold above 40 then the outlook will continue to improve. This is a recovery that is still very much in the balance and the strength of overhead supply will be difficult to overcome, so caution is required.

GBP/USD

An incredible rally came yesterday on Cable as sterling rallied sharply on all its major crosses as the market seemed reassured by the news of a potential transitional agreement to act as a buffer after the two years had expired post Article 50 being triggered. This has formed a strong bull candle of almost 150 pips of upside on the daily chart, for which the bulls are hanging on to this morning. I spoke yesterday about the importance of the neckline at $1.2330 and on a closing basis the support has still held. The importance of support now between $1.2300/$1.2330 is now of added importance. The momentum indicators are mixed on the daily chart, with the RSI still around 50 and the MACD around neutral, however it is the Stochastics that need to hold up now, around 50. Can the rally continue now? The hourly chart shows how the resistance around $1.2515 has held the bulls back overnight and this is the next barrier to overcome. The hourly momentum indicators are rolling over and an old pivot level at $1.2450 could now become an interesting barometer for today. A breach of $1.2450 would re-open the old supports at $12380 down towards $1.2330 again. The reaction in the wake of a strong directional candle is almost as important, and the bulls need to maintain the gains otherwise the sellers will return once more.

USD/JPY

I am increasingly looking for signs that the bull run is ready for a correction, however every time there is a hint of profit-taking the market is supported again. For the second time in four sessions a mildly corrective candle has been formed. Again it was a small bodied candle that threatens a correction, but it seems as though the bulls are reacting positively once more this morning to prevent the concern from spreading into something more significant. Subsequently, even though the momentum indicators are extremely stretched there is still no real sign of a loss of momentum yet. I would still be looking closely at the hourly chart though, with the hourly RSI and MACD lines in focus. If the hourly RSI drops below 40 this would be a warning, whilst if the hourly MACD went consistently negative too. There is though a degree of caution now with the uptrend just losing some steam, however it would need a breach of 109.75 support to really complete a top pattern and open a corrective move. Initial gains today put yesterday’s high at 111.36 back in range whilst the key overhead resistance is 111.45/111.90.

Gold

The support from Friday’s low at $1203.50 has held as a positive candle formed yesterday. Can this be the beginning of a recovery phase? There is a lot more that needs to be seen before the bulls gain significant confidence. The RSI is hovering around 30 and has barely ticked higher, whilst the Stochastics are still very subdued in negative configuration. The hourly chart shows significant overhead supply between $1219/$1233 and already this seems to be pulling back on the recovery this morning. Hourly momentum has unwound and this could be seen as another chance to sell. I would be looking to use any rallies as opportunities to exit long positions or open new shorts into strength as I expect further pressure on $1200 to be seen.

WTI Oil

A second consecutive strong bull candle was posted with big gains posted of well over 4% on the day. More importantly though is the confirmation of the turnaround in sentiment. The old pivot of the past few months at $46.50 had been holding back the recovery but this was decisively breached yesterday and the move is being backed by the bulls. The daily momentum is now on a run and is improving well now, with the Stochastics rising strongly with upside potential, the RSI rising strongly above 50 and the MACD lines having crossed higher to give a bull buy signal. The break above $46.50 effectively confirms a near term base pattern with a target of $49.70. The contract rollover has left a gap support at $47.50 but the bulls are looking higher even though theoretically this is a level that needs to be filled.
However the bulls are now looking to negotiate resistance of the old pivot at $48.75 and a close above this would continue the bull run.
The hourly chart shows strong momentum and a band of support now $45.90/$46.50 which is a near term buy zone. Subsequent resistance is around $50.00, $51.00 and the key high at $51.93.