Weekly Update 23rd February 2014 – LS Trader

Stocks indices remain either at multi-year highs (Nasdaq 100) or very close to all time highs (S&P 500 & Dax). This week ahead may prove critical, as another test of key resistance on the major stock index, the S&P 500, looks likely. Success or failure here may have large repercussions across several different markets and sectors.

Stocks

The S&P 500 continued to within a couple of points of its all time high but so far resistance has held firm. Multiple failed tests of resistance over the past few weeks show the extent of resistance and short sellers present at the highs. The Nasdaq 100 poked to new multi-year highs and closed slightly up for the week, but the move is far from convincing and future direction will very likely be determined by the S&P 500’s next move.

The Nikkei, by far the weakest of the 4 stock indices we trade at LS Trader still remains close to trend defining support. The recent recovery has been unable to push much beyond the 38.2% retracement of the prior decline, but for now the trend remains up. To a large extent whether further gains for the Nikkei or weakness to test key support will be dependent on whether the S&P 500 breaks out to new highs or fails once more.

Commodities

Considering the lack of movement in the dollar, which is often a key influence in commodity markets since the majority of commodities are priced in dollars, several commodities are shaping up quite nicely, and a few of which have made decent moves. A couple of which, such as coffee and natural gas have been explosive.

Natural gas continues to work its way higher towards the next technical resistance level at 6.990 having this week reached its highest level since July 2011 basis the continuous contract. At week level the RSI has risen to 77, which is a clear indication of how strong the trend is. Large daily moves continue to be seen in this market, which show now sign of abating near-term.  Coffee made its largest weekly move since 1999, such is the extent of strength seen this past week, which adds to decent rallies seen in the prior 3 weeks. Oats also had a good week, slightly exceeding the prior highs to reach its highest level since 2008.

Currencies

The dollar index ended the week slightly higher this week, but moves in the currency markets have been muted overall. Basis the weekly continuation chart there is quite a tight range that the index has traversed over the past 23 weeks, the entire range of which is just 252 points. That’s now a lot in terms of an index that has an average daily range of around 50-60 points. This does suggest that the eventual break from this range should have legs. For now it’s a matter of waiting to see which direction the market breaks. To an extent this may be dependent on the S&P 500. A decent move either up or down for the S&P 500 may be the catalyst for an extended move not just in the dollar index, but in other currency markets as well.

Interest rate futures

Interest rate futures roll out of March into June this week. Currently the long-term trend remains up for 4 or the 5 interest rate futures markets that we trade at LS Trader, based on our proprietary trend analysis.  In the shorter term prices are consolidating near the recent highs, possibly waiting for direction from stocks and the dollar.

Good trading

Phil Seaton

Weekly Update 16th February 2014 – LS Trader

For the past couple of weeks we have been suggesting that the recent decline in stocks was a corrective move in a larger uptrend and price again has again confirmed this. Stocks advanced again and the dollar declined, as is the norm with the inverse relationship between the two.

The week ahead will be a shortened trading week as the U.S. markets are closed on Monday due to Presidents’ Day.

Stocks

From last week: “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.” Strength continued this week sufficiently for the Nasdaq 100 to breakout to new multi-year highs. S&P 500 strength also continued and the retracement of the recent corrective sell-off is now very deep, so much so that a test of the all time highs posted at the end of 2013 look to be tested this week. Very strong resistance can be expected should the S&P 500 reach the 1845 area basis the March e-mini contract.

The Dax also had a strong week, continuing the rally that began at the prior week’s low. Since that low was posted, the Dax has rallied some 642.5 points, and as with the S&P 500, looks set to test recent all time highs in the coming days.

By far the weakest of the stock indices we trade at LS Trader is the Nikkei. Last week we suggested that the recovery rally may extend higher to approximately the 38.2% retracement level of the prior decline at 14895 before turning lower again. That level was reached and slightly exceeded before weakness returned. The Nikkei is the only index that is close to testing major trend defining support.

Commodities

Gold and silver have put in strong counter-trend rallies, which in the case of gold has brought a change of long-term trend to up within range. Based on LS Trader’s proprietary trend analysis, the long-term trend for gold has been down since the 15th February, almost exactly 1 year ago to the day. Silver’s long-term trend actually turned lower 4 days after gold and here to it still slightly lags gold’s advance. Should strength continue, a change of trend to up could be completed soon.

There is some evidence that the energy markets may be getting set for upside breakouts having remained range bound for years. This week saw heating oil rally to its highest level in almost a year. Should this rally continue, major resistance will be the key at the August 2011 high at 33116 basis the continuous contract.

The March Natural gas contract gapped lower at the start of the week but then rallied strongly from Monday’s low. The previous week’s high at 5.737 is the next target, and should that be exceeded next technical resistance level does not appear until 6.990.

Currencies

The dollar lost ground this week across the board and the dollar index fell to its lowest level in 6 weeks. The long-term trend still remains down for the dollar index and we may see further weakness towards the next level of key support.

The British pound had a very bullish week, breaking to new highs for the current move and indeed its highest level since 2009. The next target is $1.6882 basis the continuous contract. The kiwi also had a good week, rallying for the second consecutive week and looking set to test key resistance in the days ahead.

Interest rate futures

Interest rate futures ended the week lower with the exception of the Euribor, which ended flat. The long-term trend for interest rate futures is up in 4 of the 5 markets that we trade at LS Trader, with only the 10-year T note still in a long term downtrend. However, all of the markets remain near the higher end of the recent range so strength may yet return.

Good trading

Phil Seaton

Weekly Update 9th February 2014 – LS Trader

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.

Stocks

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.

Commodities

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.

Currencies

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.

Good trading

Phil Seaton

Weekly Update 3rd February 2014 – LS Trader

Stocks have continued to decline since the failure of the market to break to new all time highs. It is quite possible as we explain below for various reasons that this could be a key stock market top for some considerable time, with plenty of downside potential. However, for now 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.

Stocks

On the basis of the January Stock Market Barometer, a bear market lies ahead for 2014. As far as seasonal indicators are concerned, this is one of the more valid ones. It has only been wrong in a significant way in only 7 years since 1950. In essence this indicator states that as goes January, so goes the year, so a down January usually leads to lower prices later in the year and often precedes a bear market. The January Barometer has an 88.9% accuracy ratio, and based solely on this indicator and the poor stock market performance in January there could be considerable downside ahead. However, in addition to seasonals a few technicals are also pointing to lower stocks.

Although it’s not a market that we trade at LS Trader, the FTSE 100 could have put in a triple top at weekly chart level with the all time high posted back on December 30 1999. A sharp 50% decline followed until the market recovered to almost reach the highs in 2007. From there we saw another near 50% decline, which has only recently been fully retraced and ultimately exceeded. That rally too, which ended in 2013, also failed to reach new all time highs. In contrast, the Dow 30, S&P 500 and Dax all reached new all time highs in 2013 and the Nasdaq posted a 13-year high. The FTSE then was the weakest of all of these. The reason for writing about this this week is the fact that historically the FTSE has been the first to break lower several times over the years, so the triple top in the FTSE could also be warning of a coming global sell-off as it has been unable to exceed the May 31 2013 high whereas the other indices did.

Commodities

The have been a handful of decent moves this week in the commodity markets. Natural gas has been highly volatile once more, with some large daily moves being seen in both directions. The result of this was the market ending virtually flat for the week and printing a doji at weekly chart level. A doji is an indecision pattern. So, whilst the long-term trend is unquestionably up, short-term price action is less clear.

Coffee has also made a breakout to the upside, giving a confirmed change of trend and may yet head higher towards 140. London cocoa also made a decent move to the upside, reaching its highest level since September 2011.

Gold and silver have been relatively quiet, but copper, known as Dr Copper for its predictive abilities was sharply lower and may complete a change of trend to down in the coming days. Such a move would be bearish for stocks. Palladium was also weaker.

Currencies

Last week we wrote that the dollar had not reacted to stock market weakness in the way one would expect due to the historical inverse relationship between stocks and the dollar. This week has seen a return to a more normal state of affairs with the dollar rising as stocks fell. The dollar index has been strong, rallying over 100 points from last week’s low and printing a bullish engulfing pattern on the weekly chart. The long-term trend is still down but that could change soon, especially if we see a continued move towards risk-off.

Interest rate futures

The long bond looks poised for a change of long-term trend to up over the next week or so with a critical resistance level looking likely to be tested. Should this resistance level be taken out there is a decent amount of clear headway for a rally, with the next technical resistance level considerably higher at 139.56. This level will be the target should the market breakout soon.

The long-term trend appears to be shifting to up in this sector with the trend being up for Euribor, 3 month Eurodollar and 5 year T notes already. The 10-year T note and long bond could join the uptrend soon.

Good trading

Phil Seaton