Last week we wrote “the long-term trend is up for each of the 4 stock indices we trade at LS Trader and that will remain the case until we get confirming price action to the contrary. Based on price action alone the sell-off seen in the past 2 weeks is merely a correction.” Price action this week has confirmed this to be correct as stocks found support and rallied throughout the week. As stocks advanced, the dollar declined, as is the norm with the inverse relationship between the two.
If the highs posted in stocks at the end of last year do prove to be a major stock index top, the 2-week decline would be just the first leg down in a larger move. This would fit with the price action seen this past week as being a correction, which may retrace deeply into the prior decline. The S&P 500 has so far rallied just over 50% of the decline and looks likely to move higher towards the 61.8% retracement at 1802, and possibly higher.
As has been the case in recent times, the Nasdaq 100 has been the strongest of the major stock indices and this week’s retracement has already exceeded the 61.8% retracement of the recent decline. Based on the size of Friday’s up move, further strength looks likely this coming week and we may yet see a test of the recent highs, not just in the Nasdaq 100 but also in the other major stock indices.
The Nikkei, which led the recent decline, came close to breaking key support for a change of trend to down, but as support held the trend remains up. The rally from support will have retraced 38.2% of the recent decline at 14895, so that looks a likely minimum target.
Coffee’s breakout the week prior led to a confirmed change of trend to up and the rally continued this week. Last week we suggested coffee may rally to 140 and it did, reaching 144.15 basis the March contract. From that high a correction has been seen but the trend remains up.
London cocoa also moved higher, again reaching its highest level since September 2011. Cotton also advanced and may be set to test key resistance this week ahead of a possible change of long-term trend to up.
Crude oil’s counter trend rally continued this week, with the March contract briefly clearing the $100 level. Heating oil has also been strong and this week looks set to test a key resistance level, a successful break of which could yield further strength over the coming weeks. No leaded gas, which is the weakest market from the energy sector, also rose this week and a change of trend to up is within range. Each of these energy markets, with the exception of natural gas which we discuss below, remain at historically low levels of volatility. These markets are coiling up for a very big move. When this move will come is unknown for now, but it will come.
The most volatile of all commodities continues to be natural gas, which this week soared higher to 5.737 before correcting sharply. The trend however is still up but further volatility can be expected here. In the event of last week’s high being exceeded, the next technical resistance level does not appear until 6.990 so there is plenty of room should the rally resume for further gains.
The dollar lost ground this week across the board and the dollar index dropped back towards the middle of the recent range. The long-term trend remains down for the index but not a great deal of strength is required for that to change. The long-term trends in the other major currencies still remain intact, as what for the most part can be classed as range bound trading continues.
Interest rate futures
The long bond broke through key resistance, changing the trend back to up. However, the move has so far been unable to gain traction and the market pulled back during the second half of the week.
The long-term trend for interest rate futures is now up in 4 of the 5 markets that we trade at LS Trader, with only the 10-year T note yet to give a confirmed change of trend. Here the late October high remains a key price level to be crossed. If the market can successfully break that level considerable room for further rally opens up.