Technical Analysis

The market is off the lows, but still poorly postured with another possible lower high in the works (most visible on the intra-day time-frame). But there is also a higher low, too. The lower high, higher low could further contract towards a wedge, which would be inviting as it will likely lead to a tradeable breakout at some point. Still sitting in the one more leg lower camp at this time, but not willing to go too far out on a limb with this bias just yet.

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The CAC 40 is trading modestly higher this morning (+0.31%), as the ECB elected to hold key interest rates flat at an effective 0.00%. Top CAC 40 gainers for Thursday’s trading session include Technip +3.63%, Societe Generale +1.78%, and Sanofi +1.53%. The largest losers include Publicis Groupe -5.45% and ArcelorMittal trading down -1.58% so far on the day.

Technically the CAC 40 remains trading above 4,500. However, with today’s price advance, the Index is now trading above the September 22 swing high at 4,528.90. This recent move toward higher highs has advanced the opinion that the CAC 40 may be entering into a new bullish daily trend. If this trend is to continue, traders will look for the CAC 40 to next test the September 8 swing high of 4,569.60.

CAC 40, Daily Chart

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Price action in Gold has been rather erratic with multiple tests off of short-term support at $1,260, most recently on Monday of this week. After that most recent support-check, price action moved up to set a new short-term ‘higher-high, but sellers re-entered shortly thereafter, establishing a fresh short-term level of resistance around the $1,275-level. Also of interest in this zone is the projection of the prior bull-flag formation in Gold; and this serves as an example of prior support showing up as new potential resistance in a bearish technical formation.

This sets up the uncomfortable situation in which the longer-term trend and the near-term move are at odds. While the longer-term trend still retains a bullish quality above $1,200, the near-term trend is and has been bearish. For those looking to set up swing and longer-term positions, they’d likely want to wait for more confirmation of top-side continuation potential before looking to get long. Meanwhile, for traders with shorter-term approaches, the bearish move ‘could’ be workable provided risk management is in check. Meaning, traders would likely want stops inside of that recent swing high around $1,275, with targets tucked inside of the prior support hit at $1,250.

Swing positions with stops above the short-term highs around $1,276 would entail approximately $10 of risk with only $6 of reward potential (to near-term support). And in a market as coagulated as Gold is at the moment, such a risk-reward could be considered utterly unattractive.

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In our last article, we looked at the chaos unleashed in the Gold market around the U.S. Presidential Election. After intially running higher on risk aversion as it became more obvious that Donald Trump was the likely winner, an out-sized reversal started at around midnight Eastern Time on the night of the election that, as of yet, hasn’t stopped.

The Dollar has continued to run-higher, now testing 13-year highs as the ‘reflation’ trade has been getting priced-in to markets.

At the core of this assumption is the likelihood that the Fed will be hiking rates in December. Going into the elections, probabilities of a hike in December were at over 80%. On the initial news that Donald Trump may win, the Dollar sold off as this new bout of uncertainty may have caused the Fed to delay, again. But after a moving victory speech in which President-Elect Trump talked up the prospect of decreased regulation and increased infrastructure spend, equities markets began to rally, the Dollar began to re-strengthen and those themes have continued to drive through markets since last Tuesday.

Many are already aware of the inverse relationship between Gold and the U.S. Dollar (Gold is priced in Dollars, after all); but perhaps more pertinent to performance of Gold prices are inflation expectations for the U.S. economy. Inflation expectations feed into rates, which drives the Dollar which can then hit Gold prices. So we can draw the logical relationship that rising inflation expectations are a huge negative for Gold prices, and that’s precisely what we’re seeing right now on the back of ‘reflationary’ hopes around President-Elect Trump’s potential policies.

The bigger question at this point is the middleman between inflation expectations and interest rates, as the Federal Reserve has been extremely passive in the face of rising economic risks over the past 15 months. This happened in August/September of last year when China began to implode, and again at the beginning of 2016 when the ‘four rate hikes in 2016’ idea created risk-aversion the world-around. In each case, the Fed’s response was the same: More fast and loose monetary policy transmitted by commentary, expectations and/or projections. Each iteration of dovishness from the Fed has bolted Gold prices higher, and this is why Gold is ‘technically’ still in an up-trend for this year.

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The swing-low on Monday of this week came-in right at the 50% Fibonacci retracement of the December low to the July high at a price of $1,210.85. But just below that level is a more critical zone of potential support at $1,200, as this is the 38.2% retracement of the Bretton Woods Fix of $35/ounce up to the 2011 high of $1,920. Perhaps more importantly, this level has been recently confirmed as support with an inflection marking the lows in May.

Since that support inflection at $1,210, sellers have begun to display a bit of tepidness. This has allowed prices to trickle back-up to the $1,230-level, and short-term price action is now finding resistance on the projection of the short-term trend-line that we looked at above. But sellers have been unable to re-take control of Gold prices over the past two days.

So while the near-term trend is still very much bearish here, seller’s conviction appears to be waning, and should the rampant strength seen in the U.S. Dollar of recent begin to recede, the long side of Gold can become attractive again. Of particular interest to this theme will be resistance levels at $1,230 and $1,250. The level at $1,230 has shown as near-term swing-resistance, and $1,250 is a Fibonacc`i level that had also provided the swing-low during the Brexit referendum.

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CAC 40 consolidation has continued for the week, after putting in a new high on Tuesday at 4,929.60. So far for Friday’s session, the Index is trading down modestly (-0.17%) for today’s session. Top winners for the CAC 40 include Nokia (+1.68%) and Kering (+1.36%). Losers for the day include Sanofi (-2.71%) and Technip (-1.08)
Technically, the CAC 40 can be seen consolidating on the daily chart below. This 4-day range has been established by prices failing to breakout higher, which would signal a continuation of the Index’s multi month uptrend. Going into next week’s trading, traders should continue to look for a breakout above Tuesdays high. Alternatively, in the event that prices break under today’s low of 4,874.40, it may suggest that a new swing high has been put in place. In this scenario, traders may begin to look for the CAC 40 to retrace a portion of its December 2016 gains.

If prices are rejected near present values, it may suggest that the Index may then retrace back towards values of support. For today’s trading, this includes the S3 pivot at 4,892.10 and the S4 pivot found at 4,883.50. Traders should note that prices have already attempted to breakout once below the S4 pivot this morning. In the event of another attempt, bearish traders may look for new lows to be established before today’s end of trading.

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Today, we are seeing the DAX drop back into the middle of the consolidation pattern, which presents the risk that we are seeing a valid rejection upon an attempt to break higher out of a bullish pattern. It’s too soon to become outwardly bearish, but this price behavior does give pause to the bulls at the moment and could become meaningful if downside levels are taken out.

There is a lower parallel coming into play around current market prices, keep an eye on this as the first level of support. If slope support fails, then in order to at least keep the recent consolidation phase in play the DAX should hold around the 11525 level, and if not, look for the top of the digestion period from the end of the year to act as support around 11480. A break below 11480 would quickly bring in the Jan 2 low at 11414 and bottom end of the consolidation which led to the rally to start the year. At that point the sequence of rally, consolidate, rally, would be completely broken and a sign of developing trend change, even if only for a short period of time.

DAX: Daily

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The S&P 500 continues to chop sideways, building what appears, as we’ve been discussing recently, a base for an eventual breakout to new highs. Yesterday, the market started out on a negative note, dropping through the trend-line rising up off the November low, but by day’s end the decline was met with buying and closed back above. The rejection and recovery is a good sign for the market. The day low also happened to come around a top-side trend-line extending over peaks in 2007 and 2015, but hasn’t been discussed much due to how long-term it is. However, with the market now abiding by it on two occasions – once in the middle of December and then yesterday – it’s in play.

The other day, we briefly discussed the possibility of the market forming a double-top (12/13, 1/6 highs), but only if aggressive selling were able to clear a path lower. So far not the case.

The month-long consolidation now resembles a continuation-style inverse head-and-shoulders formation; marked by two declines in December and yesterday’s decline and reverse. It’s not the ‘cleanest’ looking pattern, but nevertheless one on the table. A close above the Jan 6 high would trigger the neck-line and kick off the pattern into new record territory. Based on the depth of the inverse H&S, a measured move target arrives around 2320. These continuation-style patterns many times lead to a turning point which results in a material retracement, so we'll be on the look-out for signs of a reversal should we start extending higher.

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Traders looking to execute bullish strategies can look to catch support off of prior resistance around the zone comprising $1,200-$1,204.76. Both of these prices are relevant Fibonacci levels and this zone had offered resistance when prices were on the way-up, so this can be a very opportune zone to look for that next zone of ‘higher low’ support.

Given the veracity of the move-higher, bears will likely want to wait for a break of swing support levels at $1,187.50 or $1,177 before entertaining down-side approaches.

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Taking it down to the 2-hr time-frame, the ‘right shoulder’ is taking form as a symmetrical triangle. It’s been under construction since the 1/6 high, finding support at the long-term trend-line which runs back to the 2007 highs. The triangle has developed enough to be considered a valid pattern, but like the inverse H&S pattern it just needs a proper trigger. The validation of both the broader H&S and triangle are in close proximity.

S&P 500: 2-hr

The triangle could break either way, but given the general consolidation after the power-move higher since November, it’s likely it will break in line with the continuation pattern. However, a down-side break can’t be ruled out, thus why we need to wait for confirmation, in either direction (closing bar above/below top/bottom-side trend-line). A drop below 2254 would raise red flags for the bulls, and a decline below 2248 would likely confirm that the market wants to roll over. A break through the top-side of the triangle, H&S neckline, and 2282 opens up a path towards the psychological level of 2300. The depth of the H&S formation suggests a move to around the 2320 level.

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