By Nic Lenoir of ICAP
We start the outlook for the week outlining Gold and EURUSD. Gold exhibits a lot of divergence on the hourly chart and has seen almost down to the dollar the Elliott extension for the 5th leg of the bearish impulse from the highs at 1,113.2. We expect a retracement towards 1,165/1,170 which corresponds to the 50% retracement from the highs and a move back to the wave 4 of lower order. If that zone holds on the upside we expect the market will then dip to 1,070 which is the next key support on the downside. Similarly, EURUSD shows divergence on the hourly and 3-hour charts. In terms of sub-structure we cannot exclude a final push to 1.4565, but overall we think the market should bounce this week to retest the 50-day moving average resistance at 1.4880. The slope of the 50-dma is in the process of flattening, and the daily MACD is now negative. This could indicate a much deeper correction is in the works on the bigger picture. This remains our view. We would recommend selling a bounce in the 1.4880 area if we do get there.
One of the key feature of the past couple weeks is that correlations between asset classes have been breaking down. We highlighted it a couple weeks back and we think it is a theme that will drive the next few months (see chart Gold/S&P). Oil, EUR, and equities have not respected their strong correlations of the past 6/9 months as well. Regarding Equities, the market is trading with a lot of undertainty. Usually our observations on EURUSD and Gold would make us lean towards calling a rallying S&P but it is necessarily obvious in this environment. We originally thought equities would top out around 1,105 after the bounce from 1,085, but the overnight highs indicate we could be headed for 1,117.20 before going back to test 1,084. A break there will lead us to the intermediate support at 1,067 and then the key channel support currently at 1,046 (180-min chart). In either case, we think we will retest 1,084/1,085 in the near-future.
The other key observation is that the Dollar and commodities have traded in reaction to a back-up in yields, and we feel it is one of the important characteristics of this market along with some of the commodity/equity dynamic being broken, that yields in US treasuries will be the driver of developments until we get the overdue sharp correction needed in equities. Indeed, Gold is not the driver right now, but instead it is 10Y US treasury yields. We are close to a key resistance on those yields as can be seen on the chart. Should we break here there is a risk we could go back towards the year's highs around 3.95. It is not our preference, but a lot of people are positioned long Fixed Income going into year-end, so the question is whether there is enough selling appetite to force them out and trigger the move. We will watch this development carefully. I could force the hands of the other asset classes.
Good luck trading,