Posted on: 24 Jan, 2019
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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
I’ll start the day analyzing, as usual, the RORO (risk-on risk-off) conditions in the marketplace, even if we must keep at the top of our minds that is Central Bank day, with the ECB next in line to update its monetary policy outlook following the ‘Fed Put’ by Chairman Powell earlier last year.
The price action in the RWI (risk-weighted index) is by far the most unstable and jittery it’s been this year, with a big red sell-off candle followed by a topside rejection, which has led to the 5-DMA to start flattening its upward slope since the double bottom found earlier in the year.
By looking at the individual components of the RWI on a 60-minute perspective, we’ve seen back-to-back sell off days in the ES, an indication that supply is returning. Notice both pushes were characterized by impulsive movements. The cluster of bids circa 2,630.00 is still keeping the upside potential intact, even if the 60-minute structure has now shifted into a consolidation mode. The same profile can be observed via the long-dated US 30-year bond yield, stuck in a 5bp range.
What’s arguably keeping the environment from a ‘by the book’ risk-off mode are not only the limited downward moves in US equities and US yields for now, but the breakout lower in the DXY, which has obviously been a positive for the likes of EMs, the Chinese Yuan and the overall sentiment.
The main takeaway, as noted on Wednesday, is that all the signals I’d require to be more convinced of a further deterioration in ris sentiment are yet to line up. If the ES can find equilibrium sub 2,630 on a daily closing basis and US money markets see further demand, combined with the roll over of the 5-DMAs, that will start to make investors nervous to sell risk. If on top of this assumption, a recovery in Gold prices ensued by a break above the 1,286.50 resistance on a daily closing basis, you should start playing much more defensive, with the usual suspects (JPY, CHF, USD) in demand.
The pair found demand off a critical swing low at 1.1345–50, which one could cross reference to see how relevant it’s been on the most recent price interactions (Dec 24 low, Jan 2 low). The flattening of the 5-DMA at a time when the slow stochastic is entering an overbought territory is another sign that the tide of sell-side commitment may have matured, especially in the context of such a rotation market profile for the last few months. Add into the mix that the German vs US 5-year bond yield spread as proxy of the capital flows entering EMU, US continues to show macro divergence, and one could make a case that justifies buying EUR weakness from the low levels it bounced off this week.
If there were any doubts about the current market’s darling, look no further than the perky Sterling. The resolution above the 1.30 round number is yet another major milestone as overly short hedges to protect against a hard Brexit are coming to terms about the new reality sets in with the worst-case ‘hard Brexit’ scenario rapidly fading away as a tail risk in one’s portfolio. The liquidation of short hedge structures, improved UK data, and Brexit heading into a potential 2nd referendum, have all resurrected the Sterling in a very strong fashion. Just be aware that the current rise appears to be fairly overextended, especially if one takes as reference the recent USD strength, as shown in a green line in the chart, alongside some tapering in the UK vs US bond yield spread. Play the overextended rally with caution if trading off higher time frames. If engaging in short-term plays, the bullish momentum is really strong, so fighting this trend won’t be for the faint-hearted.
The up move came to an abrupt halt on Wednesday following the test of a major macro area of resistance at 110.00. The daily analysis does not offer a clear bias to take, as we need to contend with a clear topside wick rejection in the context of a still ascending 5-DMA slope. The picture gets even muddier when we factor in the downward sloping tendencies in the 5-DMA in the US long-dated 30y US bond yield, which as we show in green, has been extremely correlated with USD/JPY. Even the DXY (in blue) is starting to carve out a potential top based on its 5-DMA measures. Overall, the indicators are far from clear until new catalysts are present, which may be just around the corner with the ECB policy meeting to stimulate risk conditions. The area between 109.00 and 110.00 should cover the short-term eventualities.
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