LS Trader Weekly Update – Tuesday 26th December 2011

The past week has been a bullish one for stocks but has also seen the dollar weaken. Once again though the dollar’s decline has not been in proportion to the gain in stocks. Although stocks and the dollar have continued their inverse relationship, the moves in the dollar have been much less than the corresponding move in stocks. Now that we are entering the final trading week of the year the long-term trends are still down for stocks and commodities, and up for the dollar and interest rate futures.

Stocks

The past week has been bullish and has seen the S&P 500 rise up to the resistance area around 1260. Due to the proximity of the market to the resistance level and the fact that the momentum in the short term is strong as well as the fact that there is hardly any upper shadow on Friday’s candle (indicating that the market h ad no sellers into the close and that the close is almost at the high of the day) the probability is quite high that the initial resistance level will be taken out. This will likely lead to a test of the 1280 resistance area and possibly the 1300 level as well in the next couple of weeks and a possible change of long term trend to up. If these levels do get taken out then we may see a continuation in the New Year towards this year’s highs around 1355. However, for now at least the trend is still down and the market remains below a couple of decent resistance levels.

As a general rule, the most bullish set up is when the Nasdaq 100 leads the way but that is not happening at present and the Nasdaq is still some way behind the S&P 500 and is currently right on the 200 day moving average, whereas the S&P 500 has already moved and closed above it.

Commodities

For much of the past few months the weakest commodity sector has been the grains. This week has seen some of these markets find support and possibly begin a reversal. Some of the trends have already come to an end for the time being whilst others are still in the trend and remaining below resistance. Considerable further strength would be required for a long-term change of trend to up and due to the extreme bearishness over the past few months that looks unlikely, at least for the foreseeable future.

Crude Oil had a very good week advancing by 6.33% having found support. This move took the market back up to test the $100 level and also above the 200 day moving average. The long-term trend remains up but it remains to be seen if there is still sufficient momentum to continue higher towards the recent highs.

Currencies

The dollar declined over the past week and perhaps importantly for the short term the dollar ind ex dipped back below the 8000 level. Since this level had previously provided good resistance it should subsequently have provided good support due to a change of polarity where prior resistance becomes support. This may now have too much impact if the 8000 and 8050 levels can be regained in the short term otherwise we may see further dollar weakness.

The dollar ended the week lower against of all the majors over the past week but the long-term trends still favour the dollar almost across the board with the exception still being against the Yen, the only major that the dollar managed an advance against, albeit by only 0.25% for the week.

Interest rate futures

Interest rate futures briefly hit new highs again on the 5 & 10 year T notes with yields falling to new lows before weakness came back to the fore and we saw the formation of some reversal patterns at resistance levels. This may well take the markets further down to test short-term support but for now the trend is still up. On the 30 year T bond, the 14650 level has provided considerable resistance and it did again this week with the market unable to push through. If we do get a Santa Claus rally continue over the next few trading days then interest rate futures may continue to fall in the short term.

Kind Regards

Robert Stewart

LS Trader Weekly Update – Monday 19th December 2011

Dear Alin,

As the year moves into the last 2 trading weeks, the long-term trends continue as they have for much of the year, down for stocks and commodities, and up for the dollar and interest rate futures.

Last Friday was triple witching, which saw stock index futures and forex futures roll out of December into June.

Stocks

Seems like everyone is talking about bullish seasonality for stock indexes at the moment as they pretty much have been since the beginning of December. However seasonality is not a reliable indicator and so far December is negative. That said, the true Santa Claus rally is actually much shorter than most people think and usually runs from the 23rd of December through to the second trading day in January so there is still time, although the 1260 area does provide some fairly decent resistance so even if it does rally the move may have limited upside. Of perhaps more interest is the fact that when the Santa rally fails to materialise, the following year is usually a bear market. I very much expect next year to be a bear market so we’ll see if the failed Santa rally (if it fails to happen) concurs with that.

Commodities

We wrote last week about gold “Gold continues to trade within a large triangle formation that goes back as far as September. The price action within the triangle is compressing which generally means that the market is beginning to coil up in preparation for a decent sized move once it makes the eventual breakout.” Gold did make a breakout to the downside and a very large move followed. February gold ended lower by 6.93% but it was considerably worse than that on Thursday, having been as low as $1562.5. The long-term trend does remain up for gold, the only metal that this holds true for, but possibly not for long.

We also wrote last week on Crude “Friday saw Crude find support from the 200 day moving average and recover some of the week’s losses but this support needs to hold or we may see a move lower to at least $95 in short order.” The 200 day moving average gave way on Wednesday and we did see a swift move down to $95 and all the way to $92.52 before a minor recovery. The long-term trend is still up but there is clear weakness in the short term.

Currencies

The dollar continues to move higher with gains seen this past week across the board. The dollar index also took out the resistance level around 8000 that we have been writing about for a while and reached a new high since January in the process. The dollar is approaching 52 week highs against several major currencies and although there will undoubtedly be corrections along the way, the trend looks as though it may stay up for the dollar for the foreseeable future.

Interest rate futures

Many traders continue to make the amateur error of trying to pick tops in the interest rate futures markets. There are many hedge fund and money managers that have been trying to short this market for most of the year, which in spite of whatever their expectations may be is a stupid move. It’s extremely dangerous to short a bull market and interest rate futures have been in a bull market for most of this past year.

While I would agree that there may be limited upside and the risk/reward for long trades may not be there, I would not be shorting this sector until there is confirmation of a change of trend and that has not arrived yet. Not only that but short-term support still continues to hold so anyone who shorts is taking a pure punt. The only exception to this is the short term 3 month Eurodollar, which is in a lo ng-term downtrend.

Kind Regards

Robert Stewart

LS Trader Weekly Update – Monday 12th December 2011

The past week saw a small continuation of strength for stock indexes but further weakness was seen in the commodity markets and the dollar for the most part was flat. Much of the week has been focused on events in the Eurozone with the Euro summit taking centre stage.

The long-term trends are still as they have been for much of the year, down for stocks and commodities, and up for the dollar and interest rate futures.

Stocks

The past week has seen stocks continue their recent short-term advance but they still remain below resistance, in a long-term downtrend, and the short-term trend is still down. On a seasonal basis this is generally a bullish time of year but as we have said many times before this is never sufficient in and of itself to take place trades. Only a few weeks ago we were in a similar position where season al bullishness around Thanksgiving suggested strength for stocks but Thanksgiving week ended up being the worst Thanksgiving week since 1932. What is of far more importance is the resistance area around 1275 and also up to 1300. If this resistance area can be taken out then we may see some further rallies but equally should resistance hold then a move lower towards the bottom of the recent range may follow.

This Friday is quarterly stock index expiration so these markets roll out of December and into March at the end of the week.

Commodities

Gold continues to trade within an large triangle formation that goes back as far as September. The price action within the triangle is compressing which generally means that the market is beginning to coil up in preparation for a decent sized move once it makes the eventual breakout. For now the breakout could go in either direction but the long-term trend does remain up for gold, the only metal that this holds true for.

Crude failed to reach the November highs at $103.37 and ended the week lower by 1.54%. This move took Crude back below the psychological $100 level but the long term trend still remains up. Friday saw Crude find support from the 200 day moving average and recover some of the week’s losses but this support needs to hold or we may see a move lower to at least $95 in short order.

As we have written before, the weakest sector of commodities of late has been the grains and this sector has also been the nest trending of late with almost the entire sector continuing to trend lower. This past week saw Rice give a confirmed trend change to down, meaning that all the grains markets are now in a long-term downtrend.

Currencies

Currencies for the most part have been uneventful and have ended the week pretty flat. The wee kly charts for many of the major show some form of doji pattern, which represents indecision. The long- term trend still favours the dollar against all the major currencies with the exception of the Yen where the trend is still down.

This Friday is also quarterly expiry for currency futures, so the end of the week sees currency futures roll out of December and into March.

Interest rate futures

We wrote last week that the lower levels were being rejected in the interest rate futures market and there was further evidence of that this week as key support levels continued to hold. This has kept yields near record lows with the yield on the 5-Year note actually falling to a new low. The upside still looks limited from here and there is more risk to the downside but the long term trend still remains up as it has for nearly all of 2011.

Kind Regards

Robert Stewart

LS Trader Weekly Update – Monday 5th December 2011

The past week has been bullish for stocks and bearish for the dollar. This was not all that surprising as the prior moves in these markets had been large, so a correction was always possible. The long-term trends however remain unaffected and the week ahead should be interesting.

The long-term trends remain in place, and are down for stocks and commodities, and up for the dollar and interest rate futures.

Stocks

The past week has been highly bullish for stocks and saw a 7.81% gain for the S&P 500, as the market reversed from the lows at 1147.50. The long-term trend is still down and the market did lose momentum on Thursday and Friday as shows by the doji pattern, followed by a shooting star. A shooting star is in fact a bearish reversal pattern with the long upper shadow showing that the market had rejected higher pr ices. Things can therefore go either way this week, with Mondays of late being bullish, so we may see a test of the highs of the shooting star and possibly the bearish engulfing pattern formed back on the 9th November. If both of these can be taken out then we may well see 1300, which is another resistance area. Therefore, there is quite a lot of overhead resistance that will need to be cleared for this market to move higher and before the trend can change to up.

The other scenario is that the highs of the shooting star and other resistance areas hold and we see a move back down to 1147.50.

The Nasdaq 100 has a very similar set up and is also showing a shooting star on Friday’s candle.

Commodities

We wrote last week about the importance of the $95 level for Crude Oil, and that level held firm and the resultant move pushed the January contract back above $100. The long term trend r emains up and the next upside target will be the November highs at $103.37

The weakest sector of commodities of late has been the grains, but most of them bucked that trend last week and moved higher, however the long-term trend is still down across the board.

Currencies

For the past few years there has been a strong inverse correlation between the dollar and stocks and commodities, with a move in the dollar resulting in the opposite moves for stocks and commodities and vice versa. This week has seen that happen once again that as stocks have gained, the dollar has weakened. The dollar index in fact ended the week lower by 1.38% and this is a smaller move than the moves in the stock markets may have suggested. In the short term we may be heading towards support around 7750 on the dollar index and what happens at the level may give a clearer indication of what’s coming next. If support br eaks here then we will likely see stocks and commodities gain, whereas if the dollar moves higher and back up towards 8000 then stocks and commodities will likely weaken.

Interest rate futures

Last week we wrote “Followers of candle patterns will know that each of these markets has been printing reversal patterns for the past week or so at resistance so these markets are certainly struggling to push higher with yields still near to record lows. Each of the 3 longer-term markets that we trade at LS Trader printed bear sash patterns on Friday, which are bearish reversal patterns.” These markets all moved lower from those reversal patterns but still remain above support and in long-term up trends. In fact, there are numerous long lower shadows on the daily candles, which indicate that lower prices are being rejected and buyers are coming in at those support levels.

Kind Regards

Robert Stewart