Weekly Update 27 November 2016 – LS Trader

The US stock markets continue to post new all-time highs, but other global indexes continue to lag behind. Friday’s close of 2211.25 on the December S&P 500 contract is the highest ever close. The dollar has also continued to rise, and interest rate futures have continued their steep declines. There are signs that some of these moves are over-extended and may see some form of mean reversion over the coming week or so.

Stocks

The S&P 500 crossed the 2200 level for the first time, making new all-time highs and a new all-time closing high on Friday. However, the continued lack and decline of volume does not bode well for continued advances. The trend remains up but buying volume needs to materialise soon, or this market is likely to be subject to a correction.

The Nasdaq 100 continues to lag the S&P 500 and therefore provides bearish non-conformation. Of course, that can change with a breakout to new highs, but volume is extremely light on the Nasdaq 100 as well.

The Dax continues to trade within a 4-month long box range which spans approximately 800 points (from 10,013 to 10,826) and looks poised for a breakout. As we wrote last week, classical charting techniques give a target of around 11,600 in the event of a successful breakout by adding the height of the range to the breakout level. However, continued failure to break the resistance area could result in a break to the downside. If a market cannot move one way, it is likely to move the other.

The Nikkei continues to benefit from a weaker Yen and has this week reached its highest level since January. However, with the Yen’s position looking extended and possibly due a reversal, we may also see a correction in the Nikkei. It should be noted that there is no volatility or valuation excess in the Nikkei, so there is further room to run. The long-term trend remains up.

Commodities

The metals rolled forward to the next contract and have continued to move lower on above average volume. Volatility is expanding but not at an excessive level by any means, which is supportive of further trend.

Soybean Oil has completed a head and shoulders pattern with a very strong candle on Friday, supported by above average volume. The break of the neckline gives a measured target in the region of the 46.00 level, some 900+ points above Friday’s close.

Currencies

The dollar index has made new 13 1/2 year highs this week but is showing a slight loss of momentum. The Euro, which is a near perfect inversion of the dollar index, is testing a major support level. This zone of strong support includes the 2015 double bottom between 1.0473 and 1.0490. A decisive break and close below this level could have further bearish implications. While there are signs in terms of sentiment suggesting a bottom, there is no volatility or valuation excess, so the Euro could still move lower. The major support level is the biggest obstacle to further declines.

Interest rate futures

Interest rate futures have declined further this week supported by considerable volume. However, there is a bullish candle reversal pattern (buying lizard) evident on the daily charts on Friday that have considerable demand tails. Volatility is also reaching extended levels so some form of mean reversion higher towards fair value may be seen soon. Regardless, the trend remains firmly down.

Good trading

Phil Seaton

LS Trader

Weekly Update 20 November 2016 – LS Trader

The S&P 500 printed a slight new all-time high this week as the stock markets complete the recovery from the initial steep sell-off on election night which was well overdone. Interest rate futures continue to crash, as yields rose the fastest over the past two weeks of any two week period in history. The anticipation and pricing in of higher US interest rates is extremely bullish for the dollar, hence the dollar’s rise to 13 1/2 year highs, as measured by the dollar index.

Stocks

The S&P 500 completed its recovery rally to print a new all-time high again this week. However, as has been the case for a long time, the rally is on very low volume, which is not supportive of further advances, although that can change with a decisive breakout. The trend remains up.

The Nasdaq 100 has also risen this week, moving back above its 50-day moving average, but this advance is also on low volume, and the divergence between the S&P 500 and Nasdaq 100 is not bullish.

The Dax continues to consolidate below its recent lows and continues to trade within a 4-month long box range which spans approximately 800 points (from 10,013 to 10,826). Classical charting techniques give a target of around 11,600 in the event of a successful breakout by adding the height of the range to the breakout level. Whether the breakout completes remains to be seen, but the trend remains up, as it has since early June.

The Nikkei has a strong week, moving above the 18,000 level and reaching its highest level since January. The trend remains up, and the RSI is in the bull range. Here, too, volume is not supportive of an extended advance.

Commodities

Silver completed a change of trend to down as expected, as both Gold and Silver continue to weaken. Gold has fallen to its lowest level since February and is doing so on substantial volume. Silver fell to its lowest level since June.

Currencies

It’s been a great week for the dollar, which rose to 13 1/2 year highs on the basis of the dollar index. The long-term trend is now shifting in favour of the dollar against all the majors, with the last two currencies still in uptrend, the Australian and New Zealand dollars, on course to complete a change of trend this week.

Interest rate futures

From last week on interest rate futures: “The selling was accompanied by 300% volume readings, so a major macro shift has been seen, and we may see further weakness over the coming weeks and months.”

Interest rate futures continue to decline, supported by heavy volume. The current declines are mature on the basis of the volatility cycle, so there may be some form of mean reversion ahead. However, the macro shift to bearish is fully in place, and interest rate futures should continue to fall to much lower levels over the coming months and years as rates rise in the US. There will be the inevitable corrections along the way, but the long-term trend is now down.

Good trading

Phil Seaton

LS Trader

Weekly Update 13 November 2016 – LS Trader

The past week has been one of the wildest weeks in a long time. The Presidential election result in favour of Trump prompted some significant moves, particularly in stocks and the dollar. The initial knee-jerk reaction was a steep sell-off in stocks and the dollar. Both moves got quickly overdone and were reversed equally quickly, so much so that the Dow 30 recovered from its steep sell-off to post new all-time highs by Friday!

Stocks

While all the pollsters, bookies and most of the market got the outcome of the US Presidential election wrong, our indicator, which we published in last week’s update had the odds of a Trump victory at 87%.

From the previous week: “The US stock market has been the most reliable indicator for picking US elections. Using pricing data for the three months up to the election has an 86.4% accuracy reading. When the stock market rises during those three months, the incumbent President or party wins. When the stock market is down over those three months, the challenger wins.

With the S&P 500 closing lower for nine consecutive days for the first time since 1980, the implied odds of a Trump victory are around 87%. Of the last 22 Presidential elections, this indicator has only been wrong three times, 1956, 1968 and 1980.

Have the bookies got it wrong again, just as they did with Brexit?”

Polling is of very limited use as has been shown by Brexit and the US Presidential election. Bookies are also getting it wrong. They make the mistake of using subjective information instead of market-based information.

From last week on the Nasdaq 100: “As with the S&P 500, the Nasdaq 100 also closed lower for nine consecutive days but remains above its 200-day MA. Volume has stayed above average during this decline, which indicates that the selling may not yet be over. We can expect a test of support at 4625.”

The selling was not over in the Nasdaq 100, and we did get a successful test and break of support at 4625, with the market falling all the way to 4558.5 before putting in a massive reversal. That reversal low marks a key footprint on the market as it was also a 300% volume day. The 4558.5 low is going to be heavily defended the next time it is tested. For now, the long-term trend remains up.

We got a very similar price rejection in the S&P 500, which recovered back to within a few points of its all-time high. The Trump victory is now being perceived as bullish by the market, probably mostly based on the view that he will employ Keynesian stimulus packages. Time will tell, but a breakout to new highs is likely.

The Dax and Nikkei have also shown similar price action and both might breakout to resume their long-term uptrends this week.

Commodities

From last week: “Copper has seen considerable strength and this week broke out of the symmetrical triangle that has been in place since January. The rally has been supported by above average volume, so we may see further strength and a change of trend to up.” We did get the expected strength and change of trend as Copper went on a huge rally, closing higher for thirteen consecutive days before a sharp one-day reversal on Friday.

The other metals also saw some large moves. Gold’s sell-off was sufficient to complete a change of trend to down, and Silver, which fell some 7.34% on Friday alone, may complete a change of trend this week.

Currencies

The dollar has had a wild ride having initially sold-off against most of the majors before putting in a large reversal. Dollar strength was sufficient to push the Euro down to its lowest level since March, and we should see new lows for the year before too much longer.

The best performer against the dollar was the British Pound, which rose for a second consecutive week to reach its highest level since early October. It also tested its 50-day moving average for the first time since early September. The trend is still unquestionably down for the Pound and will likely remain so, but we may see some additional corrective strength before the downtrend resumes.

Interest rate futures

The interest rate futures markets had almost unprecedented swings during the week. They initially sold off, rallied, and then went into a waterfall decline. The sell-offs were sufficient for changes of the long-term trend to down for the 30 Year T-Bond, and both 5 & 10 Year T-Notes. The selling was accompanied by 300% volume readings, so a major macro shift has been seen and we may see further weakness over the coming weeks and months.

Good trading

Phil Seaton

LS Trader

Weekly Update 6 November 2016 – LS Trader

The S&P 500 closed lower for nine consecutive days on Friday. This is the first time that has happened since 1980; such is the uncertainty ahead of this Tuesday’s Presidential Election. The dollar has also seen weakness this week. Many market participants have moved to the sidelines in financial markets ahead of the vote.

Stocks

The US stock market has been the most reliable indicator for picking US elections. Using pricing data for the three months up to the election has an 86.4% accuracy reading. When the stock market rises during those three months, the incumbent President or party wins. When the stock market is down over those three months, the challenger wins.

With the S&P 500 closing lower for nine consecutive days for the first time since 1980, the implied odds of a Trump victory are around 87%. Of the last 22 Presidential elections, this indicator has only been wrong three times, 1956, 1968 and 1980.

Have the bookies got it wrong again, just as they did with Brexit?

The markets dislike uncertainty, so whatever this week’s outcome is, market trading conditions are likely to improve considerably.

From last week on the S&P 500: “A test of the next level of support at 2100 could be key. If that level is tested and broken, we may see further declines.” This level was indeed tested and broken, and the selling continued, taking the market lower still.

Due to this decline, the market has closed below the 200-day moving average for the first time since June, the day after the Brexit vote. The RSI has also fallen to 27.98, deep into the bear range. For now, the long-term trend remains up, but that could change over the next couple of weeks.

From last week on the Nasdaq 100: “The trend remains up, but the increase in volume as the market declined suggests weakness may continue next week.” As with the S&P 500, the Nasdaq 100 also closed lower for nine consecutive days but remains above its 200-day MA. Volume has stayed above average during this decline, which indicates that the selling may not yet be over. We can expect a test of support at 4625.

Weakness has also been seen in other global stock indexes, including the Nikkei and the Dax, but nowhere near the same extent as has been seen in the US markets

Commodities

From last week: “Coffee rallied to its highest level since February last year and did so on above average weekly volume. Price may continue higher to test the area of the 200-week moving average, currently at 172.27.” Coffee did rally as expected, reaching the 172.00 level and coming within a few ticks of the 200-week MA. The trend is bullish and Friday’s big up day was supported by significant volume.

The energy markets have seen continued weakness, sufficient for a change of long-term trend to down for Natural Gas. Both Crude Oil markets have closed lower for six consecutive days, and a change of trend to down is moving within range.

Copper has seen considerable strength and this week broke out of the symmetrical triangle that has been in place since January. The rally has been supported by above average volume, so we may see further strength and a change of trend to up.

Currencies

The dollar has seen weakness almost across the board this week. The dollar index itself has pulled back to test its 50-day MA but has done so on lower than average volume.

The British Pound has moved inversely to the dollar index and has almost recovered sufficiently to reach its 50-day MA for the first time since September.

Interest rate futures

Interest rate futures have recovered some of the recent declines this week. The 30-Year T-Bond has recovered to test its 200-day MA but has so far been unable to press through.

For now, the long-term trend remains up for interest rate futures, but it won’t take much weakness for that to change as critical trend-defining support is not far below Friday’s close.

Good trading

Phil Seaton

LS Trader