With the exception of the Dax, stock indices failed to make new all time highs and the dollar rallied. The week will however be remembered for the ECB rate cut that surprised the markets and the near unprecedented 2 minute period of volatility seen in the interest rate futures markets on Friday. The long-term trends are still mostly intact, up for stocks, mostly down for the dollar, down for interest rate futures and down for commodities.
Following Thursday’s decline seen in U.S. stock indices, a move that was mostly retraced on Friday, it is premature to say that a top is in place for stocks. Indeed Friday’s recovery was sufficient to bring the S&P 500 back to within touching distance of new all time highs. Should these highs be taken out then the focus will return to the 1800 level on the S&P 500 and also the 16000 level on the Dow. Although the Dow 30 is not a market we trade at LS Trader due to it having historically low trending characteristics, it is nonetheless an important index and one that is heavily followed.
The Nasdaq was the index that was hit the hardest but it was noticeable that the index found support at the 50-40 handle on the RSI, an area that often provides support in up trending markets, so even though price support levels were broken, there may yet be another push higher to new highs for the year.
The Dax, as mentioned above, did briefly benefit from the ECB rate cut and hit new all time highs on Thursday before giving back a large portion of those gains. Friday once again saw the index close above 9000 but whether Thursday’s move higher and then drop lower is a terminating pattern remains to be seen. A key factor in this will likely be the performance of U.S. indices and whether the S&P 500 hits new highs once more.
Commodities in contracts to the other sectors have been relatively quiet, with most markets in the sector continuing the longer-term downtrend. Grains, metals and energies are all still in long-term downtrends with only the odd market being the exception to that.
Gold, silver and copper all headed lower this week and look as though they may fall further to test critical short-term support over the next two weeks. Should these support levels be broken, the longer-term downtrend would have resumed following the recent corrective moves higher. Of the metals sector, only palladium is showing strength and could be on the verge of a change of trend to up with a bullish breakout this week.
In the grains sector, the long-term trend is only up for soybeans and soybean meal and both markets have been bullish this week and may also both be set to resume their respective longer-term uptrends. Rice also had a bullish week, advancing some 4.18%, but the longer-term trend here is still very much down and there is considerable overhead resistance that is likely to cap gains to the upside, in spite of recent momentum.
The Euro made its sharpest 2-week decline for the year and Thursday’s low reached the 50% retracement of the rally that began on the 9th July. Due to the extent of the move and the fact that the trend is still up, it is possible that the Euro will bounce from current levels. However, the 2-week decline from $1.3834 basis the December contract has done considerable chart damage and may ultimately lead lower to test the 200 day moving average, which currently sits at $1.3240, basis the continuous contract.
The dollar index is obviously the inverse of the Euro, being composed 57% of the Euro, so following a possible near-term pullback, a rally further to the 200 day SMA, currently at 82.13 may follow.
Overall the trend is still down for the dollar with only a couple of exceptions, namely the Canadian dollar and the Japanese Yen. Against the latter there is still plenty of upside potential, which may ultimately lead to a rally to new highs for the year.
Interest rate futures
Friday saw a near unprecedented 2 minute period of volatility in the interest rate futures sector which saw the markets initially react positively to a data release and then reverse the entire move and then some, all in the space of less than 2 minutes! With the exception of the 5 year T Note, the trend remains down for the sector and the weakest of the sector, the 30-year T bond, broke lower, resuming the long-term downtrend. Although the overall trend for the sector at the moment is mixed, ultimately yields should rise considerably, leading to a sharp fall in prices, that once underway could continue for months at least.