Stocks and the dollar continue to trade in tandem, which is not the normal historical pattern where there is normally an inverse relationship between the two. This week saw stocks and the dollar weaken for most of the week but then both reversed and gained on Friday. The long-term trend remains up for stocks but is mixed for the dollar, as it is also for commodities, although the majority of commodities are currently in a long-term downtrend. Interest rate futures are also still in a long-term downtrend.
The S&P 500 ended the week lower by 0.10% but had been considerably lower on Thursday, where it tested the 50 day moving average as expected. Friday saw a decent bounce with a bullish engulfing pattern printing on the daily chart. The long-term trend remains up and a push to slight new highs can as yet not be ruled out, especially if a resolution is reached in the next week or so in Washington, ahead of the October 17 deadline for raising the debt ceiling. Such an agreement seems highly likely and this will probably lead to a relief rally for stocks.
It was a similar story for both the Nikkei and the Dax, although their respective reversals were not quite as convincing as the S&P 500’s.
The Nasdaq 100 remains the strongest of the 4 stock indices that we trade at LS Trader and is the only one to have held above short-term support. As with the other indices, the Nasdaq 100 also printed a bullish reversal candle on the daily charts on Friday and remains the closest to its yearly highs. For now the trend remains up for all 4 indices.
The VIX had a good week in spite of considerable weakness on Friday, but the fear index still ended the week higher by 8.28%, which is not really surprising considering the political struggles across the pond. Basis the cash VIX, the highest price was registered since the end of June, which coincided with the start of the recovery rally in stocks following their steep sell-off from the end of May.
Commodities remain mixed but the majority are still in long-term downtrends. The grains markets in particular remain under pressure as they have for much of the year to date. There are a few commodities that are in uptrends and these come from the softs and agriculture sectors and include cotton, feeder cattle and lean hogs. Sugar, which has been bullish since posting a low back in July of this year is on the verge of a change of long-term trend to up and may continue higher should a change of trend be confirmed.
The energy sector remains mixed but no leaded gas and natural gas continue to lead the way lower whereas the remainder of the sector is still in a long-term uptrend.
Metals have been quite volatile of late but the trend remains down for the sector. This week saw the weakest two markets of the sector, gold and silver, break to new short-term lows but neither has as yet been able to continue lower. New lows below the lows of the year are still a possibility.
In last week’s update we wrote that the odds favoured a weaker dollar over the near term and that the next downside target for the dollar index was at the 2012 Q3 lows around 79.50. This past week saw the index fall to its lowest level since January at 79.72 basis the December contract, before reversing higher on Friday. The trend remains down for the index but should dollar strength continue and move above near-term resistance, the recovery may continue higher to close the gap at 81.51. However, with the long-term trend being down, lower prices cannot be ruled out.
As before, the long-term trend is against the dollar in all but 3 of the currency markets that we trade at LS Trader, the Aussie, the loonie and the Yen.
Interest rate futures
Interest rate futures pushed to slight new highs for the recent corrective rally but for the most part traded in a fairly narrow trading range, probably waiting on some agreement out of Washington. We still view the rally as corrective and whereas the shorter-term 5 & 10 year T-notes are pushing towards the 50% retracement of the decline from May, the 30-Year T-bond still remains well shy of the 38.2% retracement of the same decline. Whether the long bond reaches that level before resuming the downtrend remains to be seen. The trend for the sector is still down across the board.