The price action of the past week suggests that the top for stocks may be in for the summer and that further declines will be seen. This week has also seen the dollar uptrend get back on track and the inverse relationship between stock indices and the dollar seems to be returning to a more normal state of affairs.
As we wrote last week, although price action in the short term is pointing down for stocks, as yet the declines have not been sufficient to give a confirmed change of trend, although that may follow in the coming week. The summer is historically weak for stocks so if the technical continue to point to lower prices, future declines may surprise.
We mentioned last week that support on the S&P 500 at 1591 basis the September contract needed to hold if new highs were likely to be seen near term. Now that support was broken, the odds favor further declines towards the next support level around 1525.
The Dax has shed nearly 600 points in just 3 weeks, and has seen sharp decline this week, which included a gap lower during the middle of the week. This suggests an impulsive decline is underway and that prices may head lower, although for now the long term trend is still up.
The support level that we mentioned last week on the Nikkei at 12420 held so for now the trend remains up. As before, if support there is broken we may see further declines to 12000.
Gold and silver collapsed this week, keeping the long term downtrend firmly in place. However, the extent of the recent declines and various other technical indicators suggest a bounce may again be due. Silver this week dropped below $20 for the first time since September 2010 and has now declined 60% from the April 2011 highs around $50.
These two markets and the price action seen during the past couple of months present a great learning opportunity. Many traders who caught the downtrend in its entirety, as we did at LS Trader, would have been tempted to cash in profits around April 16th when the market made a new low for the current move. That would have been a mistake for the simple reason that the trend was still down and could still move lower. Although both gold and silver put in decent bounces during the following weeks, they never rallied sufficiently to confirm that the trend had ended. Those that had the fortitude to remain short, again as we did at LS Trader, have been rewarded with new lows and larger profits than would have been gained had profits been banked earlier in the move.
One of the core principles of the LS Trader system is to let winning trades run. This has been amply highlighted by the moves in gold and silver. Those that cash in profits early and take small profits can never by definition take large profits if they never give small profits the chance to grow into large profits. It is only by taking larger profits out of the markets over time that one can be profitable, as large profits are required to cover the losses generated by small losing trades and leave some left over for overall profit. This is one of the great keys to profitable trading that few follow.
Coffee declined another 3.63% this week and remains on course for our long term target of 107.
The energy sector was unable to push higher to compete a change of long term trend to up and price action this week keeps the downtrend intact for the sector. August Brent crude looks set to test the 100 level this week, which if taken out will likely lead to a move lower towards the April lows below 97.
The dollar index put in a strong reversal, keeping the long term uptrend intact. The dollar in fact reversed the recent short term weakness seen against several of the major currencies and now looks set to continue higher over the coming week and months.
Interest rate futures
Interest rate futures put in one of the largest weekly down moves in years, confirming the long term downtrend. From last week’s update “As we have covered several times over recent months, there is considerable long term downside potential for this sector, it’s just really a matter of when these markets truly break down.” This week’s moves suggest a substantial decline may be in its early stages. There will undoubtedly be some bounces and corrections along the way put prices look set to decline further over the coming weeks and months.