Stocks have continued their slow and steady climb higher to post new all time highs yet again. The dollar has been mixed but remains weak overall. Commodities have seen some increased volatility with weakness seen in the metals but some strength returning in other markets.
In last week’s update we wrote about the key round number levels that were in play in the stock indices. The Dow and the S&P 500 both moved above these round number resistance levels, although only just on the S&P 500, which did not move above 1800 until Friday. Of bullish significance is that fact that the index closed above this level on Friday. A strong weekly close often implies continued strength the following week so we may yet see further strength for stocks.
The Dax also posted a new all time high this week, but that was on Monday. The index spent the rest of the week moving sideways but this culminated and a new high weekly close.
The Nikkei also moved higher and the focus remains as before on further strength towards the May 22nd high of the year, which is still some 700 points above Friday’s close.
In last week’s update we wrote “When markets don’t react to what is apparently bullish news, it suggests hidden selling pressure is present in the markets.” That hidden selling pressure became evident this week with gold and palladium breaking out to the downside. The target for gold remains at the low of the year posted on the 28th June at 1182 basis the December contract. Silver continued lower below the shelf of support that has held the market up for a couple of months and may now continue lower towards the low of the year.
The dollar index closed lower for the week but the index has moved in a fairly narrow range for the past 2 weeks, suggesting that an eventual breakout from the range may lead to a meaningful move. For now the long-term trend is down with resistance in place at 8158 basis the December contract. If 8158 can be exceeded, dollar strength may get underway and the index may press higher towards 8300.
However, much of what happens in the dollar index will be dependent on what happens in the Euro as the index being made up of 57% Euro is almost a perfect inversion of EUR/USD. If the Euro can hold to its current uptrend and work its way back towards the high of the year at 13834, the dollar index will remain under pressure and fall back towards its low of the year.
The big move in the currency markets came from a sharp 3-day sell-off in AUD/USD. The weakness seen since the 23rd October high suggests that may have been a significant high for the time being and that new lows may be seen in the coming weeks.
The inter-market relationship between a strong Nikkei and a weak Yen continues to play out with both markets moving in line with expectations. Nikkei strength is a contributing factor to Yen weakness and this week saw the dollar push above one of our key targets against the Yen and we still remain on track for a continuation higher towards the high of the year (dollar strength/yen weakness) in the coming weeks. As we’ve mentioned many times before, USD/JPY generally moves independently to other major currencies, so dollar weakness elsewhere usually has little impact on dollar/yen.
Interest rate futures
With the exception of the shorter-term interest rate futures, the long-term trend remains down. The long bond fell to its lowest level since 18th September on Thursday before bouncing higher. The trend though is clearly down with the market below the 50-day SMA, which in turn is below the 200 day SMA. The long bond has by far been the weakest of the sector and the only market in the sector that has a current trade active.