Stock markets reversed aggressively this week following a new high at the open which could not hold. The price action this week certainly represents a change in personality of the market and puts the market into corrective mode. Interest rate futures collapsed, making their lowest print since 2015 (30 Year T-Bond).
Stocks opened the week higher but were unable to press further as the weakness that commenced on Monday continued throughout the week, with a significant down day on Friday. The reversal broke short-term support on the S&P 500 and the Dax and had taken the Nasdaq 100 right to support, which will likely be tested and probably broken on Monday.
The reversal printed on the S&P 500 is a key reversal on the weekly chart. However, the long-term trend is still most certainly bullish, and this can only be viewed as a correction in a bull market at this stage. Considerable further weakness will be required for a change of trend. Nonetheless, it has put a large dent in the bull case.
Bullish sentiment, which had been at or near record highs for several weeks, took a battering as the percentage of bulls has dropped from 96 to 39 in only two weeks.
The Nikkei and Dax have both been weaker than US markets. We exited a profitable Nikkei trade during the prior week on a break of support. The Dax also broke support this week and not only did it break short-term, support, it also broke medium-term support. A change of long-term trend to down is within range on the Dax and could complete later this week if weakness persists.
The energy markets have seen some weakness this week and support has been tested and stands a good chance of getting broken this week.
The metals markets have also seen weakness as Gold, Silver, Palladium and Copper were all lower.
The grain markets continue to show signs that a long-term bottom is forming, or is already in place. Corn is on the verge of a change of trend breakout to up, which could complete this week.
The Euro closed the month significantly higher, so according to the January effect, the low for the year should be in at the January low at 1.1964 (basis March contract). Of course, there is no guarantee this pattern will hold this year, but it does have a very high strike rate.
From last week on the Dollar Index: “A bounce can be expected soon here, but the trend is firmly down”. A small bounce has been seen in the Dollar Index, and resistance could be tested this week.
If the January effect in the Euro holds, and we have seen the low of the year in the Euro, the inverse of the Euro is the Dollar Index. This would suggest that the Dollar Index has put in it’s high of the year (note, the Euro makes up 57% of the index, so this pattern is less reliable). That high currently stands at 92.36 (basis March. contract).
Interest rate futures
Interest rate futures collapsed this week as the hugely profitable downtrend continued. However, it should be noted that sentiment has become extremely bearish, registering in a rare single-digit reading. Sentiment has not been this negative since December 2016, from where a significant rally ensued.
The long-term trend remains down across the sector and is likely to continue so for a considerable time, even if we do get the expected short-term bounce.