The past week has been fairly quiet in terms of trading activity but has seen an increase in stock market volatility and what could be described as a possible change in market personality. It seems that we are in the early stages of a much-needed volatility expansion which is beginning to filter into many markets. This is good news for trend followers as expanding volatility leads to an increase in momentum and volume, and ultimately, big trends.
From last week: “Overall, the long-term trend for global stocks remains bullish, but there are signs that some markets are getting tired.” Stock indexes made new highs early in the week but then pulled back in a more aggressive pullback than we have been used to seeing. Compare the size of the daily bars this week to a chart of the past few months, and it’s evident that something has changed. This can be clearly seen on the Dax and the Nikkei, and the uptrend is certainly under pressure this week in the Dax.
The Nasdaq 100 saw a wide range day that spanned around 100 points on Thursday, but the decline was bought aggressively, recovering much of the day’s earlier losses. Similar price action was seen in the S&P 500. This price action gives mixed signals, as on the one had, the lows are being bought, but on the other hand, a lot of buying pressure has been used up to remain down on the day.
Brent Crude continues to press higher towards our next target at 65.98 with a view towards the longer-term target from the head and shoulders pattern, which projects to 88.00. The weekly chart shows a beautiful upside breakout with expanding volatility. Similar trading activity has been seen in the other energy markets, which all remain bullish. Even Natural Gas, which has been by far the weakest market in this sector for some time, has made some upside progress this week and a change of long-term trend to up is on the horizon.
Lumber reached our long-standing target at 461 this week, printing a new high at 461.9. The 1993 high at 471 becomes the next target. There are some negatives for the move with bearish divergence between price and RSI, declining volatility and volume. However, markets can and do continue to advance under such conditions. As of Friday’s close, we have a huge 8753 points profit on this trade since entering back on the 5th September at 37207.
Corn, which has had incredibly low levels of volatility in recent months declined to its lowest level this year on Thursday and has seen heavy volume this week to accompany the decline. The 2016 low at 314.75 is a possible target.
London Cocoa has been in a downtrend and trading range for a long time, but we could be seeing the early stages of a rally, breakout and change of trend to up. It’s a similar story for Sugar, where we have seen record commercial buying in recent months. The normal position for commercials is short, as they are hedging their products, so when you see record buying and a net long position that is unusual and indicates that they know something that the market does not.
The dollar has consolidated against most of the majors for much of the past two weeks. This is highlighted by price action in the Dollar Index where price has moved in a fairly narrow range since the breakout of the head and shoulders bottom on the 26th October. Support has been found twice exactly at the neckline (prior resistance becomes support). Friday’s close is only 18 pips above the neckline so Sunday’s open could quickly determine whether that pattern is going to fail, and prices resume downwards in the direction of the primary trend, or whether we continue to get a counter-trend rally.
The British Pound continues to find support from the trend line we mentioned in last week’s update. A decisive close below that trend line would have bearish implications. For now, the long-term trend remains up.
Interest rate futures
The long-term trend remains down for US and UK interest rate futures as these markets turned lower this week. The 30 Year T-Bond made a new high for the counter-trend rally on Wednesday, but selling followed which took the market back below both its 50 and 200-day moving averages.
The shorter-term markets remain the weakest in the sector, and the LS Trader system remains short both the 5 Year T-note and the 3-Month Eurodollar.