2018 continues to show signs that it’s going to be a great year for trend following as multiple markets continue to trend well. There are also markets that have yet to break out but are in the process of building favourable setups. The grains markets, in particular, are starting to look very interesting. More on that below.
The long-term trends remain up for stocks, up or turning bullish for most commodities, down for the dollar and down for interest rate futures.
Unless we get a crash during the last three trading days of the month, stocks are going to close the month well up. Based on the January barometer, this points to a full year of gains for stocks. Both the S&P 500 and the Nasdaq 100 closed the week out at new all-time highs, both printing a marabozu pattern (closing at the top of the candle with no upper shadow). This shows momentum into the close and is often followed by strength at the opening.
There are bears everywhere calling for a top, just as there have been since November 2016 and all of 2017. Eventually, they will be right, but for now, these markets just keep on truckin’. Trying to pick tops against such strong momentum usually results in bears getting made into rugs! As long as the markets remain above support, and they do, there is no reason to bail out of longs and certainly no need to short.
The Dax broke out to new all-time highs as expected but has so far been unable to push on. The Nikkei had a bit of a pullback and broke short-term support, but remains in a long-term uptrend and may hit new highs again soon.
The grain markets overall look as though they may be in the process of putting in a long-term bottom and there is huge rally potential for several markets in the sector. Market sentiment in the sector is low, as is volatility, which continues to awaken. Most importantly perhaps, there is huge commercial buying. The grains markets could enter a huge bull market this year.
The energy markets remain strong with new highs for the current move being printed this week. There is, however, bearish divergence in the Crude markets, so momentum is waning. However, markets remain above support, and the trend is bullish.
Natural Gas completed a change of trend to up for the first time since 2016, and now the entire energy sector is in a long-term uptrend.
Lumber prices made their highest print since 1993 as the bull market continues and closed within a dollar of all-time highs. Expect a new al-time high print this week.
The Euro made a new high for the current move on Thursday but that day also saw an indecision bar printed. It’s looking increasingly likely that the Euro has put in its low for January. If that is the case, then the January effect suggests that the low for the Euro may be in for the year. However, sentiment is very high, as is volatility. Commercials again have a record net short position. A pullback would not be surprising, but the market, for now, remains bullish and above support.
The British Pound is now trading above pre-Brexit lows, and except the commercial position, which is only slightly net short for the Pound, a similar case can be made for a correction in the Pound.
Given the above comments, it’s no surprise that the Dollar Index continues to collapse. Sentiment is very bearish, with only 10% bulls. Commercials have gone slightly net long having unwound a large short position. A bounce can be expected soon here, but the trend is firmly down, and buying here is the equivalent of catching a falling knife.
Interest rate futures
Interest rate futures remain weak with all markets in the sector making new lows for the current move. The UK Long Gilt has held up better than US markets in recent weeks, but that too broke support as expected and has resumed its long-term downtrend.