The new trading year got off to a flying start as several markets made some significant moves. Stock indices made their worst start to a year in decades, and in the case of the S&P 500, the worst start ever.
The long-term trends are down for commodities and stocks, up for the dollar against the majority of currencies, and mixed for interest rate futures. If strength continues in the interest rate futures sector this week, we will likely see a change of trend to up for the entire sector.
We have covered in recent weeks how the last five trading days of the year and the first two of the New Year form the traditional Santa Claus rally period. We also wrote last week that the markets were going to struggle to reach their rally target. When this happens, the historical records show that when the rally does not materialise, the new trading year is often a bear market. Certainly the year has begun on a very weak note for stock markets.
At LS Trader, although we look at the historical and season tendencies for markets, we never place trades based on this information as it is only a tendency and is not reliable enough to make trading decisions based on it. Subsequently instead of being long as many were, we were short the stock indexes and racked up very quick profits from our short positions this week. The long-term trend is down for three of the four stock indexes that we trade, and is only up still for the Nasdaq 100, where we are currently flat.
Commodities have had an eventful week. The energy markets, in particular, have been volatile. Monday saw these markets move sharply higher with a price spike through resistance. They then reversed and moved sharply lower through to Friday, where a small bounce was seen.
The long-term trend is still down for the entire sector, but Natural Gas is currently the strongest having rallied to its highest level since mid-November, moving decisively above its 50-day moving average and also moving through the 60 level on the RSI for the first time since May last year.
The dollar had a mixed week, and in spite of gains against some majors, the dollar index ended the week lower.
One of the weakest currencies against the dollar was the British Pound, which contained recent declines and reached and exceeded our downside target of 1.4544. This saw the Pound print at its lowest level against the dollar since mid-2010. The next level of structural support is another 500 pips lower at $1.4015, which was the 2010 low. Whether the Pound declines that far over the coming weeks remains to be seen.
The Japanese Yen continued its recent sharp advance against the dollar, moving well above its 200-day moving average to reach its highest level since August.
Interest rate futures
The interest rate futures sector rallied this week, and the long-term trend remains up for four of the five markets we trade in this sector. The long-term trend remains down only for the weakest market in the sector, the 30 Year T-Bond, and that may change this week if further strength is seen.
All markets in the sector are now above their respective 50 & 200 day moving averages, and the shorter-term markets have seen their RSIs move through the 60 level, returning to the bull range, which is indicative of further gains over the coming weeks.