It has become clear that the forex and risk assets have become range bound of late. The market is clearly waiting for a new piece of information that makes them question whether they are holding assets at the correct price. For now, everyone seems to be relatively happy that all the news is baked in.
In the oil market, supply scarcity concerns outweigh recessionary concerns. Today, OPEC+ is considering pushing production, while refining capacity for oil products, which drives the economy, is declining. The XLE ETF tracks the energy sector in the US within the S&P500 Index. It is designed to allow investors to take strategic and tactical positions at a more targets level than traditional style-based investing. So, what is the XLE telling us? To me, the energy sector has fallen from the highs of June 2022 following the FOMC 75bps rate hike. Having previously found resistance at the 2.618% extension from the first wave following the COVID-19 crash. If the price action had stayed above the lows of March & April 2022, I would have put the decline down as a retracement, profit-taking, and regular pullback.
As it is, we have found support from the daily 200-period EMA but have essentially broken market structure and look more bearish. The bullish scenario of a look below, liquidity grab and then trade back inside the range for a possible move higher looks to have come undone with yesterday’s bearish close, suggesting that the bulls that bought the dip, are not in control now.
Brent has also fallen from the highs at the same time and this week we were in a possible short squeeze scenario. Yesterday’s rejection of the 61.8% retracement level is suggesting that the bulls have lost momentum. The daily Stochastic indicator had signalled a higher run in price when the oscillator closed back above the 20 (over-sold) level. We had seen similar moves back in March and April. With the lack of bullish momentum around $115 per barrel, I am wondering whether we see the Stochastic now returning to the 20 level and that price action makes a series of lower lows and lower highs, as per the decline in November to December in 2021.
The US dollar has been trading near the year's highs for most of June and looking at the weekly chart of USDCAD there has been a bullish June that has reversed the bearishness of May. Momentum and price action had compressed under the weekly 200-period EMA but after the breakout, and retest of 1.2800 these last few weeks, we could now be witnessing dynamic resistance flipping to dynamic support. 1.03770 is a bullish target to remove what orders are resting above the weekly relative equal highs. That would see the 9-period EMA closing above the 200 and momentum could then drag price action higher towards the 1.3200 – 1.3400 zone.
The daily stochastic had dipped below the oversold level and is now trading back above it. A bullish close today would cement the bullish signal from the oscillator. Looking back along the 2022 timeline, this has yielded some positive results as a trading signal though the constant return to the daily 200-period EMA has not been the best for trend followers. What we should consider is that the weekly chart is at a level of support and the daily chart is signaling the pullback is complete. This means, that tomorrow after the US ISM Manufacturing PMI we should have a better idea of whether recessionary pressures are going to be buried or elevated by what is happening with the oil and energy supply. If the market remains bearish on the oil and we see a greater rise in the US PCE data today. That would give the green light to another 75bps rate hike and put another nail in the market's coffin as fears build toward a recession.
With a bullish bias in the USDCAD, the first trade that I would consider taking is a breakout of the Bull Flag chart pattern, with 1.2900 as my guide for where I want to see price continuously close above. Anything below that level and there is a chance that the price continues to correct back to 1.25500 to backfill the breakout from the 9th of June. The problem with going long the USDCAD on a breakout is that we run straight into known overhead resistance. The 1.30500 level has proven to be a level of supply and resistance, where traders have initiated or added to short positions over the last couple of months. To clear the bears out, I’d like to see a break above 1.3100 with a pullback to what was resistance to what could be support, before a continuation higher. At the same time, I’d also want to see oil and XLE dropping still.