The churn in markets is continuing as traders try to figure out the next move as we end the first half of the year. The rebound from the March low has found resistance and set up an Island Reversal pattern in US equities, creating a demand for bonds and gold in a bid to find some safety and hedging. This has also created movement in the USD as the risk on move fades amid a rampant virus surge in the US. But in essence the markets are at a crossroads here as we close out the month. Some technical indicators are sending bearish signals but others are suggesting that support is nearby and that markets may continue their move higher, such as the engaging of support around the area of the 200 DMA. The key since March has been the intervention of central banks in supporting markets and the economy. The actions of government stimulus and support packages have also helped the risk on theme. Now markets are in danger of profit-taking if additional support is not given or if the market deems it is not enough to sustain the rally in risk assets. The rising numbers of Covid-19 cases, particularly in the US has ignited fears of a second series of lockdowns. The actions of companies, by shutting their stores in the worst hit areas, on their own and without government order, has made markets realise that consumer confidence may not rebound unless the virus is brought under control by whatever means necessary. The actions of reopening the economy too soon may have had the opposite effect by denting demand and allowing the virus to spread, a situation that was made worse by the protests on the streets of US cities. New Zealand is a case in point this morning, where the Prime Minister has said that “it is untenable to open up borders due to the coronavirus”. The hope was that New Zealand could form a “bubble” with Australia but rising cases there have made New Zealand wary of allowing travel to a country with rising case numbers. The market is focussed on rising case numbers around the world and this is leading to a risk off tone. Coupled with a lack of fresh intervention on the monetary and fiscal side, the tone this morning is following on from Friday’s risk off mood. The Japanese 225 has closed lower by -2.3%. The Shanghai Composite is trading lower by -1.4%, while the Hang Seng is trading down -0.7%. European Futures are down by around -0.8%. Gold is trading at 1773.00 while USDJPY is trading around 107.120.
On the calendar today, German CPI readings are expected to be released throughout the morning. UK Mortgage Approvals are expected to rise to 25K from 16K. BOE Governor Bailey is due to deliver opening remarks at the Climate Financial Risk Forum, via satellite. In the afternoon, US Pending Home Sales are expected to rise to 18.9% from -21.8%.
The EURUSD pair is breaking lower after finding resistance at its lower high at 1.1420. The pair found support at 1.0640 earlier in the year leading to a rally that created the lower high last week at 1.1348. The pair is now testing the 1.1240 level. This area formed as resistance after the March rally and is important for traders. Resistance has formed at the level and must be overcome in order to set up the sustained breakout above 1.1300. The 1.1200/1.1160 area may now also offer support to the pair. Any break down below these levels may lead to a move towards 1.1150 and the 1.1145 level. Below this level of 1.1150 area, support potentially comes into play at the 1.1120 level ahead of 1.1100. Further support may arise at the 1.1020 area and the November low at 1.0981. The 1.0900 level and the 1.0870 area may provide some support but the 1.0700 round number may be used if the selloff breaks the low area around 1.0800. Price action has found support around the February low of 1.0777, using this area to build a base and creating further support at 1.0727.
The 1.1240/1.1250 area may offer resistance in the short term followed by 1.1260. The former supporting level at 1.1275 may be used ahead of a renewed test on 1.1300 and 1.1320. But a breakout higher may result in price action testing the lower high at 1.1367 and breaking above 1.1400. A break of that round number level may see price move higher to retest the 1.1420 level. Beyond this the 1.1450 level may be used as resistance followed by 1.1475 and then the 1.1500 area.
German 30 Index
The German 30 Index has sold off from the 13830.00 all time highs, and found support in the 8000.00 area, but has since retraced and the index is now trading around the 12000.00 round number after creating a lower high at 12935.00. Current resistance may be seen around the 12200.00 area. If this resistance breaks, a push higher may target the resistance levels at 12292.00, 12500.00 and above 12886.00, with a view to building support and testing the 13000.00 level round number. This would require buyers to break the resistance around the 12890.00 level from December and push price higher in to the 13000.00 area. The consolidation in April led to a breakout of the range and a strong advance during May and June. The next area of potential resistance beyond the top of the range, lies at 13050.00 and is followed by 13160.00 from February. The resistance ahead of the market top formed at 13372.00 and is followed by the 13500.00 area. From there the high at 13830.00 level comes into focus.
Price action found short term support around 12000.00 after testing the level overnight, but is now fully engaging the area and has drifted under the trend line support from the March low, ahead of the European open. A confirmed loss of this area opens the way to 11835.00 followed by 11600.00. Further support may be seen at 11565.00 ahead of 11500.00. The 11340.00 area may also act as support followed by 11000.00. The 10850.00 region has been used as support and resistance on the chart and may be engaged by traders. Below this level the 10135.00/10000.00 area may also provide support but a loss of this area may open the way for a retest on the 9375.00 zone followed by the 9000.00 support area. A breakdown from this area may engage the supporting lows at 8917.00 and 8436.00, with a loss of this support potentially opening the way to test the 8000.00 level followed by the 7700.00 area.