The past week has been a very active one in the markets, one that has seen the dollar’s rally come to an abrupt halt before a mild recovery towards the end of the week. It has also seen considerable weakness in stocks, which continue to look as though they may have already posted significant highs and are now headed towards lower levels.
The long-term trends are all intact but stocks may be on the verge of a change of trend to down, which will be confirmed with additional weakness.
From last week on the S&P 500 “The long-term trend is still up but last week’s low may be key in the short-term, and if broken along with a break of 40 on the RSI, a move back to the August low at 1882.25 may follow.” That low did initially provide some support before giving way, and considerable weakness followed on Friday. The RSI broke through the 40 level and a test of key support at 1882.25 now looks likely. Should that level give way, we can look another 40-odd points lower towards critical trend-defining support.
The Nikkei, having at one point shed almost a thousand points during the prior week made a similar decline this week. For now the long-term trend is still up but that may change. The RSI, which moves ahead of price has already completed a range shift to down following the break below 40. Further weakness towards critical trend defining support may follow over the coming week or so.
The Dax continues to be the weakest of the stock indexes that we trade at LS Trader, and was the only one of the four that was already in a long-term downtrend; the August to mid-September corrective rally being insufficient to produce a change of trend to up. This week saw the Dax break critical support and resume the long-term downtrend. The RSI dropped to a bearish 22.78.
The Vix made a huge rally on Friday and for the week, reaching levels not seen in almost a year. This indicates that volatility and fear are returning to the markets having both been absent for long periods.
From last week on gold and silver “Sentiment in both metals is extremely bearish, with silver bulls coming in at just 4%. This does not guarantee a rally but does show that selling pressure may be running out of steam as presumably virtually everyone who wanted to sell precious metals already has.” A corrective rally came right on cue, following a decline in the yellow metal to $1183.3, just $3 above our long standing target of $1180. However, the long-term trend is still down and it would be premature to suggest that following this correction, new lows will not be seen, both here and in silver. The RSI in both metals is still very much in the bear range.
Large moves were seen in the energy markets as the entire sector fell. The long-term trend had been down for quite some time already, but this week saw an acceleration of the downtrend through to new lows for the current move before a mild recovery on Friday. The RSI in each market is in the bear range, with the exception of natural gas, which is narrowly clinging on to a shelf of support.
From last week on the dollar index “Longer-term we continue to look for higher prices, but with the current rally in the dollar at near parabolic extremes, and sentiment at levels rarely seen, a correction would not be surprising in the least. There is short-term bear divergence in the RSI as well”.
The dollar rally ran out of steam, leaving the dollar index unable to extend its 12-week rally. An overdue correction has been seen and as of yet it’s not clear whether the correction has run its course, or if there will be further weakness. Either way, the long-term trends all favour the dollar and following the end of the correction new highs for the dollar should be seen.
Also from last week “Weekly RSI on the Euro has dropped to 14.86, a low not seen since 1997. Sentiment is also at bearish extremes for the Euro.” The Euro also bounced higher as expected and other currencies duplicated the rally against the dollar.
Interest rate futures
Interest rate futures continued with strength that began the previous week, keeping the long-term uptrend intact across the board. The long bond and both the 5 & 10 year T notes all rallied to their highest level this year and may now be set to rally further to test their respective 2013 highs.