As we usher in 2016, we look back over monthly charts for the FTSE, Dow Jones, EUR/USD, USD/JPY and gold.
Dow Jones Industrial Average
Throughout the weakness seen in the second half of 2015, the Dow Jones has suffered significantly less than its European counterparts. As such, many of the bearish signals inherent within the likes of the FTSE are not evident here, with the Dow and S&P500 both still relatively close to the previous highs set earlier in May 2015. That all-time high of 18,365 is the key level in question. A closed candle above this level would prove the recent pullback was merely a blip within a wider bull market.
Interestingly, the MACD histogram has only dropped substantially below zero on four occasions over the past 20 years. The most notable of these were in 1999 and 2008 which marked the beginning of the last two major market selloffs. However, we have also seen the MACD histogram fall into negative territory in 2015, which to some extent seems to mimic the 1998 retracement, which preceded the wider selloff 18 months later. Whether we are seeing a similar warning sign or even the onset of a selloff remains to be seen, but it is certainly notable that we have seen the histogram trade within the red throughout the vast majority of the past 12 months.
Looking at the stochastic oscillator as another proxy for momentum, the Dow has seen the 50-level prove pivotal in much the same manner as FTSE 100. Interestingly, we have not seen the stochastic fall below 50 and this really captures the differences between the UK and US benchmarks over H2 2015. It is also apparent in the lead up to this recent selloff; we had seen a clear bearish divergence between price and momentum, where the continued creation of new highs in price were not matched by the stochastic.
Utilising cyclical analysis, it is highly interesting to note the time between both 1999 and 2007 peaks is a period of seven years and eight months. Adding this same amount on from the 2007 peak provides July 2015, which is the month when the stochastic fell below 80 (overbought) in the stochastic oscillator and into the red on the MACD histogram. Cycles denote that markets will tend to move in waves of set timeframes and thus it is interesting to note that we enter into 2016 with a number of momentum and cyclical signals that mean the bull run could be coming under pressure.
Overall, the US markets are faring considerably better than their counterparts over the Atlantic, yet warning signals are evident in both markets. The ability to regain the 18,365 level would be very telling as a bullish continuation signal for the Dow. However, with a number of warnings signs across multiple markets, the downside risk is certainly evident within this market too.
Key resistance levels: 17,915, 18,365 and 20,000
Key support levels: 15,253, 14,198 and 11,750
Understandably, the past two years have been tough for the euro, with a range of crises capped off by the implementation of a quantitative easing programme at the European Central Bank (ECB). However, the monthly chart will perhaps surprise many, given that we have largely seen a lack of direction throughout 2015 despite a dominant bearish sentiment. This is evident when considering that the 1250 point range set between 15 January ($1.1715) and 13 March ($1.0462) which marked the extremes for the remainder of the year.
One thing that is evident within this chart is the existence of two long-term trendlines of support which have come into play throughout 2015. Interestingly, the fact the euro was only officially introduced in 1999 means that the left hand side of the chart is created as a basket of 11 legacy currencies. With that in mind, perhaps some might want to disregard the initial trendline point as this could be arguable. However, the trend of this currency pair is clear, with a sloped M shape evident over the past 30 years. With this in mind, it would make sense that EUR/USD will rally from a higher base than $0.8231 to continue the trend. From a technical point of view, the existence of both the multi-decade ascending trendline alongside the descending channel bottom dating back to 2008, provides a zone of significant support which will likely shape how 2016 will look for EUR/USD.
The fundamental picture is certainly geared towards further losses in this pair, given the divergence of monetary policy between the ECB and FOMC. However, for a substantial amount of further losses to occur, it makes sense this support zone must be cleared. With that in mind, the breakout from the $1.1715-$1.0462 range that has been dominant throughout 2015 will be crucial to the direction of EUR/USD in 2016. The overall selling pressure seen throughout the past seven years, coupled with the lack of any true reversal signal means the outlook remains bearish unless we see a close back above $1.1715.
Interestingly, the pair has been seen substantial swings over the past eight years, with the MACD histogram passing from negative to positive on three occasions. Each time this occurred within the middle or latter part of a rally in price action. With this in mind, it is particularly bearish to note that we are once more on the cusp of a positive crossover, despite the EUR/USD barely being able to muster two consecutive months of gains. This hints that perhaps any resurgence could be the shortest in over a decade of ups and downs.
Key resistance levels: $1.1715, $1.2042 and $1.3000
Key support levels: $1.0462, $1.0000 and $0.9525
USD/JPY has had quite a four years, with the hype and then implementation of Abenomics leading to a 56% appreciation in this currency pair since early 2012. However, what is evident from the monthly chart is this rally seemed to lose steam in 2015, with price consolidating below both a key long-term descending trendline and horizontal resistance level at ¥124.13. Interestingly, this is also the scene of the 23.6% Fibonacci retracement from the 1983 high to 2013 low.
This confluence of resistance is going to be absolutely crucial for 2016, where a clear break and close through ¥124.13 would provide evidence that we could be set for yet another strong move higher in this pair. Should this occur, 2015 would look a lot like the consolidation seen in late H2 2013 and H1 2014, which eventually set up another strong move higher. However, we also have a chance that perhaps this level is a step too far for the currency pair, where arguably, the most significant monetary policy changes have been factored in and thus any further action is likely to result in proportionately smaller reactions in terms of dollar strength or yen weakness. Given that we have seen by far the strongest four-year rally in USD/JPY in the past 30 years, there is certainly scope for 2016 to see this pair start to turn lower once more and the key to this would be a close below ¥116.21.
Looking at the momentum indicators, it is clear the MACD is providing a bearish signal, with the MACD line crossing below the signal line in the most convincing manner since late 2010 (pre-Abe). This provides us with the most negative histogram reading seen on the MACD since 2009. As for the stochastic, we have seen a break through both trendline and horizontal support at 70, providing us with another bearish signal.
Ultimately, the destiny of USD/JPY in 2016 will likely be derived from the resolution of the ¥116.21-¥124.14 range. My bias is towards a more bearish year following on from what has been an outstanding four years for USD/JPY bulls. However, standing in the way of such a strong uptrend is certainly a dangerous game and as such, a notable close below ¥116.21 would be crucial to instigate a more protracted move lower.
Key resistance levels: ¥124.14, ¥126.00 and ¥135.00
Key support levels: ¥116.21, ¥105.44 and ¥100.75
Gold has been trading within a falling wedge for three years now, following on from an exorbitant ten-year bull market which came to an end in 2011. Utilising the monthly-chart really puts this selloff into perspective, with price having lost just over 50% of that decade long rally. The fact the stochastic oscillator has remained around the oversold region for over two years is no surprise given the relative lack of any lasting rally in that time. However, with price forming a falling wedge formation, there is a potential we could see that upside break occur within 2016.
A falling wedge is bearish by nature and this is especially the case within an uptrend. However, with such a clear long-term selloff in play, we would need to see concrete signs before a recovery can be called with any confidence. With that in mind, a move back above $1191 would provide us with a good chance of a recovery. That said, it is worth considering that we have failed to create a single new high over the past five years and thus to see a move back above $1191 would not only represent a bullish wedge break, but also the first new major high in five years.
Key resistance levels: 1191, 1307 and 1388
Key support levels: 1033, 1000 and 730