Weekly Update 2 October 2016 – LS Trader

There are several markets that are in the pre-breakout phase and that are potentially well placed for breakouts. Although numerous markets are currently consolidating, there are multiple markets that are well within the range of breakouts, including the energy and currency markets. If, as is usually the case, the breakouts and resultant trends are proportional to the prior consolidation, there are some big moves on the horizon in multiple asset classes.

The Nasdaq 100, currently the strongest of the four stock indexes that we trade at LS Trader, tested its recent high but was unable to break through. The long-term trend remains up but volatility continues to undergo compression and volume remains below average, suggesting there is little fuel to push this market higher. That could change if we get a breakout to new highs, but for now, the trend is in a precarious position.

The S&P 500 is also close to its all-time highs but is also undergoing volatility compression. Currently, the market its finding support at the 50-day moving average.

The Dax once again found support from the down sloping trend line from the 2015 high, which arrested the declines this week, leading to a bullish day with decent volume on Friday. The trend remains up for the Dax, and the RSI is still in the bull range. A test of 10,800 may follow.

The Nikkei 225 continues to consolidate and is still undergoing volatility compression at daily and weekly chart level. Based on my indicators, volatility on the weekly chart is the lowest it has been since November 2012. Not long after that, the market rallied some 7000 points over the next six months. That does not mean that the market will rally this time, we could see a significant move to the upside or the downside; it just means that in terms of volatility compression we are in the pre-breakout phase which should yield a large move once the breakout completes.

We wrote last week that the energy sector was also undergoing significant volatility compression and that they were in the pre-breakout phase. The energy markets rallied this week and may test key resistance in the next few days. A breakout from this current consolidation and volatility compression should yield a decent move in the direction of the breakout.

Orange Juice reached its highest level since 2012 before pulling back. If support holds, we may see further rally to all-time highs, at 226.95.

It’s the same story again in the currency markets, where the sector as a whole continues to consolidate. The dollar index remains locked in a range, trading sideways along its 50 and 200-day moving averages, both of which are also flat. If there is a textbook case of lack of trend, the dollar index is it.

Although this low volatility compression phase is present in most currency markets, there are a few that are edging towards critical levels, which if taken out could awaken some volatility and volume metrics, leading to a sustainable price trend. For now, we remain in consolidation.

Interest rate futures
The long-term trend remains up for the interest rate futures sector, but these markets continue to consolidate in the region of the 50-day moving averages. The RSI tested the 60 level on the 10 Year T-note and has so far been unable to break through. If it can, we may see a test of price resistance and a possible upside breakout, followed by a test of the July highs.

Good trading

Phil Seaton

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