We have written in recent weeks and many times over the past few years about the unreliability of seasonality and stated that seasonality alone should never be used to form the basis of trades and that ultimately, trends and price action were far more important. This sentiment has been confirmed once again by price action seen so far this month, which has run counter to seasonal tendencies.
From the beginning of the month, stock indices have continued to press higher in the direction of the long-term trend, in what is historically the weakest month of the trading year. The dollar has been less decisive and is mixed, whilst commodities are mostly pushing lower in the direction of their longer-term trend.
This week sees the 2-day FOMC meeting. The key to remember is that it is not the news itself that is important, but the markets’ reaction to the news that drives price action.
The S&P 500 had a good week, advancing by 2.14% and pressing once more back towards its all time highs at just ticks below the 1700 level, basis the December contract. The index shot higher from the open on Monday, moving decisively back above the 50-day moving average.
The Nasdaq 100 also had a good week and is still the leader of the indices we trade at LS Trader by way of being the only one of the four that is at its highs of the year. Cleary though from a much longer-term perspective the Nasdaq is weaker since it is still a long way below its all time highs posted 13 odd years ago, whereas the other indices are just points below their respective all time highs.
The Daxalso had an excellent week, advancing by 3.03% and taking out the top of the recent range, suggesting that a test of the year’s highs and possibly higher is the game over the coming weeks.
The December Nikkei had another strong week, gaining another 3.99% to add to the previous week’s 4% advance, keeping the uptrend very much intact. Last week we wrote: “Of short term interest is the evening star 3-day bearish reversal pattern that has formed right at resistance. Often the best use of candlestick patterns is for when reversal patterns fail, and the markets break out above the high of the pattern (in the case of bearish reversal patterns). A move above last week’s high, particularly on a closing basis, would be bullish.” As anticipated, the market did break out above the pattern, and strength followed, keeping the long-term trend intact.
The long-term trends are therefore still very much up for global stock indices and the odds therefore favour higher prices over the coming weeks. The VIX however, known as the fear index, has fallen to 4-week lows, indicating that complacency is reaching new high levels, often a precursor to sharp declines.
Soybean meal and soybeans, the only two markets from the grains sector still in a long-term uptrend had very volatile weeks, with large swings seen in both directions. In both markets the rising windows mentioned in the last two weekly updates have held firm on a closing basis, so the bottom of the gap is still providing support for both markets. The other grains markets are not faring so well and have either resumed or are on the cusp of resuming their respective long-term downtrends.
Considering recent dollar weakness, the weakness that has resumed in the metals sector suggests that new lows may be forthcoming over the coming weeks, as commodities being priced in dollars generally move inversely to the dollar. This suggests that once the dollar resumes strength, commodities and metals in particular will come under further pressure. The trend for the entire metals sector is down and the corrective rallies seen over the past couple of months or so look to be over.
Indecisive trading remains characteristic of the currency markets and the dollar in particular in recent weeks. The longer-term trend still slightly favour the dollar, but the dollar index is perilously close to support. For the uptrend to remain intact, the dollar index needs to resume higher from current levels.
In last week’s update we wrote about a possible test of key resistance in GBP/USD and the market did test and exceed resistance, giving another change of trend against the dollar. Following the breakout the pound continued higher and may now test $1.60 soon.
Interest rate futures
Interest rate futures pushed marginally higher as their recent corrective rallies have continued. The longer-term trend still remains down but as we wrote last week the steps to new lows are not in a straight line.