The past week has seen the Pound fall to its lowest level in 31 years and has seen a sharp decline in Gold. Stocks continue to hover near all-time highs. Many markets and asset classes remain in a pre-breakout phase and the large moves seen in Gold, and the British Pound could be a sign of things to come in several other markets over the coming weeks.
The stock markets remain in a very neutral position. Compression is evident in price, volume and volatility. In terms of the US markets we have inside bars on the current quarterly, monthly and weekly charts, and until a slight range expansion on Friday, we also had an inside bar on the daily chart as well. All these things add up to a coiling market that is preparing itself for a large move. With price near to all-time highs in the case of the US markets and the trend being firmly up, the normal technical picture would lean towards upside resolution, but that view is not supported by declining volumes. We shall have to see what unfolds, either way, this tight low volatility environment is coming to an end soon.
Gold fell out of bed in a big way this week. Following the trend line break seen the prior week (trend line up from the December 2015 lows), price moved lower this week and took out horizontal support that had held for three months. This led to further liquidation and price fell below its 200-day moving average for the first time since February.
The commitment of traders data has recently had large speculators at record all-time long positions, with commercial hedgers at record all-time short positions. This is not normally a position that is conducive to further advances and usually results in capitulation from the longs. If that happens, we could see considerable liquidation and lower prices, with a change of long-term trend to down on the horizon.
As a side note on COT data, it is a very lagging indicator and most of the time is of limited use. The only time when it can be useful is when record levels are reached, which is what we have now in Gold.
We’ve been writing for weeks now about the lack of trend in the currency markets and have been stating that, along with a few other asset classes, currencies were in a tight, low volatility environment and that they were in the pre-breakout phase. That remains the case, but there are some signs of life, particularly in Cable (GBP/USD) and the dollar index.
Cable broke to new 31-year lows basis the cash markets this week, falling sharply in overnight trading early Friday morning to 12034 (December futures). This decline has the market on target to reach the 11396 level that we wrote about a couple of weeks ago. Following that swift decline, the Pound recovered and closed the week at 12445, but remains in a very deep downtrend.
The dollar index also broke out of the initial congestion zone to reach its highest level since July and may now test the key July resistance high.
Interest rate futures
Interest rate futures moved lower this week. The 30-Year T-Bond has now closed lower for six straight days and is at a key structural support level. The long bond also looks set to test its 200-day moving average this week. We have also seen the 40-level broken on the RSI. All things considered, next week’s trading could be crucial for this sector. A change of long-term trend to down is on the horizon, but as yet unconfirmed.