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Daily Market Analysis - November 16, 2018

Nov 16: Recovery in risk as capital flows return to Aussie land

Quick take

  • Risk model: Recovery in risk against ‘risk-off’ structure
  • EUR/USD: Tapering of volume & order flow hint falls ahead
  • GBP/USD:New hourly bearish cycle, 100% target reached
  • USD/JPY: Sellers have the upper hand intraday
  • AUD/USD:Bullish stance as capital flows return to Aussie land

Fundamentals: Break down of market drivers + key releases

  • UK Brexit Secretary Raab resigns, triggering a sharp sell-off in the Sterling as UK PM Brexit plan grows in uncertainty.
  • UK PM May faces a ‘no confidence vote’ within days.
  • Australian employment report came very strong.
  • UK retail sales failed miserably, although not many traders cared given the unstable Brexit situation.
  • US retail sales (both headline & core) came upbeat.
  • US Philadelphia Fe Non-Manuf saw a sharp decline.
  • US Crude oil inventories saw a massive build up, over 5 times more than what the market was expecting.


Risk model: Recovery in risk against ‘risk-off’ structure


Our risk-weighted index has seen a marked recovery off the lows on the back of more positive short-term flows. The rise in US equities (S&P 500), the bounce in US yields and the limited buy-side interest in the US Dollar has led to a microstructure characterized by the return of ‘risk-on’ flows. Extreme caution must still be applied, as the short-term movements come in stark contrast with the ‘risk-off’ structure we recently transitioned into, as marked by blue above.

The S&P 500 has validated the creation of a new cycle low after breaching 2,700.00 earlier this week and is now headed straight into two major areas of intraday resistance at 2,746.00 and 2,765.00. I am expecting limited upside, which if true, would constitute the 2nd shoulder of a potential head & shoulder formation on the hourly. Less clear is the outlook for the 30-year US yield, which appears to be establishing a range between 3.33 and 3.39 following a double bottom. Even if long-dated US yields break higher through 3.39, it’s going to take a rise in equities above 2,765.00 or further weakness in the US Dollar to sustain the ‘risk on’ environment. Judging by the impulsive latest leg up in the DXY, I doubt this is a plausible scenario.

Overall, we should see as more logical a reshuffling of flows back in alignment with the defined structures than the other way around. The critical areas to monitor will be 2,765.00 in the S&P 500 and about 96.70 or 1.1350/60 in the Euro/US Dollar. Let me reiterate it again, be wary of supporting risk flows when the structure is still far from offering us clear signals for risk flows to extend much further. Never lose sight of the forest (structure) for the trees (flow).

EUR/USD: Tapering of volume & order flow hint falls ahead


Will the weekly print a fake candle? We are about to find out in 24h. On the daily, the price is re-testing again the 50% fibo retracement from its latest fall, which makes it attractive to start considering shorts. By dissecting the hourly, we can see how the connotations of the order flow and volumes are both indicating the rebound should be limited in nature. Firstly, the velocity of the move down came much more impulsive vs the corrective upside move. Secondly, we are finally starting to see the tapering of volume into 1.1353 resistance ahead of the next critical area at 1.1395/1.14. By analyzing the 3-day correlations on a 30-period, we can start to justify as to why selling the Euro around near-by levels would be well justified based on the latest tick ups in the pair while both the German vs US and German vs Italian yield spreads head lower. The correlation for most of 2018 has been very strong, hence it’s acted as a great guide to assess the intrinsic value of the pair.

GBP/USD:New hourly bearish cycle, 100% target reached


The market looks poised for further downside judging by the latest selling flows, which have formed a sharp vertical move down. The next areas of critical support come at 1.2847 ahead of 1.2887, where I am expecting sellers to perceive value to extend the decline in line with the newly found down cycle. Note, yesterday’s fall landed as one may have expected, at the 100% target projection at 1.2737, hence why we might be in for a very short-term corrective move up towards the mentioned areas. There is significant disarray around the UK’s Brexit plans as the UK PM faces a revolt by some members of her Cabinet and a ‘no confidence’ vote has been called in the next few days. If we see a confirmation of a resolution sub 1.2730 on the weekly, the next target mid-term is found around the 1.22 level. In terms of correlations, by assessing the 3-day correlations on a 30-period, it exists all the justification in the world to argue for lower levels based on valuation. Both the UK vs US 5-year yield spread and the EUR/USD indicate more downside.

USD/JPY: Sellers have the upper hand intraday


As I wrote yesterday, we are seeing evidence that the weekly resistance between 114.00 and 115.00 remains a nut too tough to crack. On the daily, the price is rolling over without reaching its expected 100% projection target, while the hourly is starting to build down-cycles and respecting what used to be a strong area of support at 113.60/65 as resistance (not a good omen). The latest decline has made it to the 100% projection target, from where a strong rebound has taken place. Also note, the recovery in the USD has come under decreasing volume, while the breakout through 113.60 saw a pick up in volume activity. By cross-checking the price vs its correlated instruments (US vs JP yield spread and our risk-weighted index), it argues for lower levels, especially considering how strongly correlated the 3-day performance it’s been on a 30-period basis as a standard used by banking institutions.

AUD/USD:Bullish stance as capital flows return to Aussie land


With the 2018 descending trendline on the Aussie being stared from the rare-mirror, the next question traders will be asking is whether or not the Aussie can make it past 0.73/7315. If that’s the case, it allows for the next 100% proj target located at 0.7436, even if first we will have to battle through the 0.7364 daily resistance. On the hourly, the market continues to be bought up quite with decent conviction based on the volumes we are seeing. In terms of structure, we are in the 2nd cycle up, with a sequence of intraday supports underneath, also backed up by an ascending trendline. In terms of correlations, the rise is underpinned by capital flows back into the appeal of Aussie bonds as the AU vs US 5-year yield spread rises to its highest since early Sept. The Yuanweakness is one instrument that is not backing the rise in the Aussie, although the stability in the currency alone ahead of 7.00 vs the USD is a comforting sign for AUD buyers. Lastly, the decoupling of gold as a correlated asset against the Aussie is notorious. Bottom line, looks like the capital flows are a key driver at the moment.

Important Footnotes:

  • Risk sentiment model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the following tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. The weekly cycles are highlighted in red, blue refers to the daily, while the black lines represent the hourly cycles. To understand the principles applied in the assessment of cycles, refer to the followingtutorial HowTo Read Market Structures In Forex
  • POC: It refers to the point of control. It is depicted by a red line on the bottom right side chart for each candle. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the following tutorial How to Read Volume Profile Structures
  • Tick Volume:Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement.Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlikelevels of dynamic support or resistance such as Fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor.
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets that can add an edge to your trading. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that this outlook is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the100% Fibonacci projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% Fibonacci projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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