It’s been a wild few days in the currency markets, which have seen large swings following comments from the Fed about a delay in interest rate rises. However, a correction in the dollar’s huge bull run was already overdue since sentiment had reached historical extremes, and the bull market was already mature, so the comments were more likely a catalyst than a cause of the move. If the correction continues, a weaker dollar may benefit U.S. stocks, and new all time highs for the S&P 500 could be seen this week. A weaker dollar would also benefit commodities.
Support from the RSI held and the S&P 500 continued to recover recent losses and now looks set to test and likely break through resistance, and post new all time highs once again. As mentioned above, a period of dollar weakness may benefit stocks due to their normal inverse correlation. The inverse correlation is not 100%, and there have been periods where stocks and the dollar are correlated and move together, however the more normal price action is closer to inverse correlation.
The Dax rolled this week to the June contract, and posted new all time highs early in the week, and closed within range of new highs on Friday. The Dax remains bullish, as do all global stocks at present and new highs can be expected again. Following the reversal in the currency markets and our exit of our Euro and dollar index trades, the Dax is now our most profitable trade from our current open positions.
From last week on the Nikkei: “19,505, which was the Nikkei’s high back in July 2007 basis the continuous contract, is the next target. Should that level be cleared, sights would be set on round number resistance at 20,000.” The Nikkei cleared the 19,505 target that we mentioned last week, and now looks set to rally further to test 20,000 in the coming days and weeks.
We wrote last week that price action in gold and silver would be dependent as to whether gold broke its November low. It did not. This, along with comments from the Fed that interest rate rises may not be as imminent as expected sent the dollar sharply lower. A weaker dollar is generally good for commodities and in particular gold and silver. Both precious metals rallied and may continue to rise if further dollar weakness takes hold. The long-term trend for gold is still up, since the aforementioned critical support level held, and further strength may see a change of trend to up for silver in the weeks ahead.
From last week “the strong rally seen in crude was not sufficient to break 60 and take crude out of the bear range. This suggests that now lows will be seen.” New lows were seen in crude as expected, as crude dropped below the late January low. A moderate bounce has since been seen, but the trend remains down.
From last week: “Although there is no question that sentiment for the dollar and against the Euro is at historical extremes, the same has been true for the past couple of months, but no reversal has been seen. A turn in both markets is clearly due…we will exit on evidence of a reversal”.
The evidence required for an exit was delivered this week as the dollar fell sharply across the board, bringing to an end, at least for now, the dollar rally. The longer-term focus is still very much dollar bullish, but a period of weeks or even a few months of dollar weakness, correcting some of the recent larger rally, may be due. In fact, the recent rally in the dollar index was 27%, which in terms of percentage gains, is the second largest in the dollar’s history. In spite of the reversal, the LS Trader system banked huge profits from the short Euro and long dollar index trades, which amounted to 1857 pips from the two trades combined.
Interest rate futures
From last week on interest rate futures: “This Tuesday’s COT report indicates that it is small traders that are short, while commercial hedgers remain long. This shows that the short side of the interest rate futures markets is in weak hands and that we may see further rally. Whether that rally is sufficient to retest the recent highs remains to be seen. The first indication of that will be a move back above 60 on the RSI.”
Interest rate futures rallied, and the RSI broke through the 60 level as expected. Further strength may be seen. As before, whether there is enough left in these markets to test the late January highs remains to be seen. The long-term trends remain up across the sector.