The position in the markets is currently very interesting. We’ve had a correction lower in stocks, a new rally in energies, continued weakness in metals and possibly the start of a new uptrend in interest rate futures.
This week’s decline in the stock markets resulted in support being broken in the Nasdaq 100 and S&P 500 and resulted in a resumption of the long-term downtrend in the Dax.
From last week on the Dax: “The Dax has seen considerable weakness over the past two weeks following the failure to breakout above 13186. Price has fallen back to the middle of the range between the late January high and the March low. A head and shoulders pattern is forming on the weekly charts, but additional weakness is required to complete the pattern.” The Dax had sufficient weakness to resume the downtrend, but as yet we have seen little in the way of follow-through.
The S&P 500 is still in the large triangle pattern that has been in place for four months. This pattern could resolve itself in either direction, but with the long-term trend still up for US stocks, the odds favour an upside resolution. In other words, the bull market in US stocks is still intact.
The metals have seen continued weakness. Last week on Copper: “Weakness continued this week, and a downside breakout is very much within range early this week. Commercials have a record net short position which suggests weakness will continue and support will be broken this week, resuming the long-term downtrend.” Copper broke support and remains in a long-term downtrend, as do the other metals.
Also from last week: “Gold fell to new lows for the year and may continue to decline towards the next level of support around $1250. Silver and Palladium have also seen weakness and the long-term downtrend could resume this week.” Gold exceeded our $1250 target, printing $1246.9 on Friday and remains weak. However, sentiment is very negative, and volatility is reaching extreme levels, so a counter-trend rally could be seen soon.
Last week on Crude Oil: “Crude Oil was higher by 5.71% on Friday and 7.86% on the week. The long-term trend remains up across the sector, and we may see continued strength back towards a test of the May highs.” Crude rallied as expected, in fact, more than expected and not only retested but exceeded the May high, reaching its highest level in 3 1/2 years and resuming the long-term uptrend. There appears to be further to run for this market, with further rally towards the $84 level a possibility. Other markets in the sector, especially Brent Crude, could also breakout this week.
From last week on the currencies: “Typically, when sentiment gets this low, a short-term reversal, correcting the prior trend is not too far away. We have seen some of that this week with several majors bouncing higher from their recent lows.” The currency markets continue to chop around near their recent lows/highs, and sentiment remains near an extreme.
## Interest rate futures
The long-term trend remains down for interest rate futures, as indeed has been the case since the trend changed to down back in October last year. However, many traders and commentators have been focusing on the expectation of higher interest rates, and since rates move inversely to prices, lower prices. That has been the case since October. The problem with that is that when so many people are on the same side of the trade, there is nobody left to sell and that often resolves itself in a move in the opposite direction.
Since late October, speculators have been building up record net short positions, while commercials have been accumulating record net long positions. The result of this has been two large counter-trend swings, once in March and the next in May. We now appear to be in the early stages of a third swing higher. When commercials build up record positions, prices usually eventually move in favour of the commercials. This suggests further upside ahead and a possible trend change to up. This will, if it happens, catch speculators on the wrong side of the market and result in forced short covering.
Also, there is a head and shoulders bottom potentially forming on the 10 Year T-Note and 30 Year T-Bond. The neckline is still a decent way above current prices on the 10 Year T-Note but is within range on the long bond. If the neckline is broken, we could see a significant rally from the technical perspective, too, possibly to around 153 on the long bond.
For now, the long-term trend remains down, but that could change soon. Keep an eye on these markets for exciting developments in the coming weeks.