Weekly Update – 29 October 2017 – LS Trader

Market conditions are looking better than they have in months as some directional moves are appearing in the energy markets, currencies, interest rate futures and stocks. Stock indexes broke out to new all-time highs; Brent Crude hit a 2-year high and interest rate futures are breaking down. At the same time, the dollar’s corrective recovery continues.

Stocks

Stocks remain bullish on a global scale, and new all-time highs were made this week in the S&P 500, Dax and Nasdaq 100. The S&P 500’s high of 2580.75 is just 20 points shy of our 2600 target, and that could be printed this week. The Nasdaq 100 fell through short-term support on Wednesday but reversed course and blew through the top of the running wedge on Friday on bullish news. Tall candles such as this on news events are often blow-off tops. Time will tell. The target for the running wedge remains at 6400.

From last week: “The Nikkei also continues its strong run and may test the April 2000 high at 21,800 this week.” The Nikkei, which lags behind all-time highs by a huge margin, reached its highest level since November 1996 basis the continuous back-adjusted chart.

The Dax tested and held support and surged back to new all-time highs on Thursday and Friday, keeping the long-term uptrend intact. There is bearish divergence between price and RSI, but volatility remains low enough to suggest that there is still upside potential.

We wrote last week about the Dow’s RSI reading, which at 87.78, was the 9th highest 14-day RSI reading in history. This week saw a new high in price without a new high in momentum, so there is some short-term bearish divergence.

Commodities

The energy markets turned bullish this week with multiple upside breakouts. Except Natural Gas, the entire sector is now in a long-term uptrend.

Price action this week saw Brent Crude break the neckline and complete an inverted head and shoulders pattern and made its highest print in 2 years. There’s a similar pattern in Crude Oil, and both Heating Oil and RBOB Gasoline also broke to new highs for the current move.

Lumber resumed the uptrend this week and remains on target for our next target at 461, having made a new 13-year high this week.

Sugar has the makings of a potentially very constructive setup. The COT data shows that commercials are holding their largest long position in history. This is generally, but not always, bullish. Also, we have a 4-month ascending triangle setting up, an upside breakout of which would also complete a change of trend to up. In addition, we have very low readings in the ADX, which means that there is plenty of room for the market to run if it breaks out. If the upside breakout is successful, we have targets at 17.47.

Currencies

We wrote last week about the potential head and shoulders bottom forming in the Dollar Index and noted that we could expect a break of the neckline. The neckline was broken this week, and this suggests that the bottom is now it for the dollar index. We see the mirror image in the Euro where we have a head and shoulders top. However, both of these moves have formed against the prevailing long-term trend in both markets, so as yet we do not have signals in either market.

Dollar strength is evident against other majors where we have long dollar positions against the New Zealand dollar, Japanese Yen and Swiss franc.

Interest rate futures

Both 5 & 10 Year T-Notes broke support and the latter completed a change of long-term trend to down and the 30 Year T-Bond is right on the breakout level. The potential head and shoulders top on the 30 Year T-Bond continues to form, and a break of the neckline could be seen in the coming weeks.

Good trading

Phil Seaton

LS Trader

Weekly Update 22 October 2017 – LS Trader

The past Thursday was the 30-year anniversary of the October 1987 stock market crash. The stock markets experienced a fairly sharp dip early in the day but recovered just as quickly before going on to make new all-time highs in the case of the S&P 500. Global stock markets remain bullish but also extended.

Stocks

There are many reports in the media from so-called experts that claim that the stock markets are ‘climbing a wall of worry’. The fact is that this simply is not the case as bullish sentiment is at a very high 89% and the VIX, known as the fear index, fell below ten this week. These combined indicate an almost complete lack of fear and the opposite of a wall of worry. It may be true to say that these markets are over-extended, as they clearly are, and could correct at any point, but climbing a wall of worry is false. They are, in fact, almost as bullish as they can get.

Using the Dow 30 as an example, the market is at approximately four standard deviations above fair value based on our proprietary indicators. This is the most extended this market has ever been. Our proprietary volatility/directional indicator has the market at an extreme not seen since the 2009 low. We also have, at 87.78, the 9th highest 14-day RSI reading in history. Such readings are extremely elevated on all the major timeframes, monthly, weekly and daily.

Does this mean that a top is in? No. Markets can remain overextended and ‘overbought’ for very long periods, often much longer than short-sellers can remain solvent. It does mean that conditions at all the major timeframes are ripe for a correction and when such a correction comes, the reversal is likely to be sharp. For now, the trend for global stock indexes remains bullish, and that remains so until the weight of the evidence shows that this has changed.

The S&P 500 leads the way and the bearish divergence that we commented on last week has been erased as we have had a new high in price accompanied by a new high in momentum. Bulls will be pressing for 2600 this week.

The Nasdaq 100 has lagged the S&P 500 this week but still made new all-time highs on Wednesday. The market remains above the top of the running wedge that we have discussed in recent weeks, which still points higher towards 6400.

The Nikkei also continues its strong run and may test the April 2000 high at 21,800 this week.

The Dax remains the weakest of the four indexes that we trade at LS Trader, but even then was able to print a new all-time high and cross 13,000 for the first time. The Dax is undergoing significant volatility compression which suggests that it will be the first index to break lower, particularly if it closes back below the resistance level from the June all-time highs which should now act as support.

Commodities

The commodities markets remain subdued on the whole and the best trending market of the past few weeks continues to be Lumber, which remains on target for our next target at 461 over the coming weeks in spite of a minor correction this week.

Currencies

The dollar has continued its recovery this week against most of the majors. There is the possibility of a head and shoulders bottom completing this week with a break above the neckline. Such a move would suggest that the dollar had bottomed and may continue to press higher towards a change of long-term trend to up over the coming weeks.

The dollar has already completed a change of trend against the New Zealand dollar and Swiss Franc and may also do so if key support gives way against the Japanese Yen. (Support for JPY/USD, resistance for USD/JPY).

Interest rate futures

Interest rate futures were unable to clear last week’s high and weakness resulted in the five-year T-Note breaching support and completing a change of trend to down. The 10 Year T-note and long bond could follow and also complete a change of trend to down this week. The potential head and shoulders top on the 30 Year T-Bond continues to form, and a break of the neckline could be seen in the coming weeks.

Good trading

Phil Seaton

LS Trader

Weekly Update – 15 October 2017 – LS Trader

Global stocks continue to press higher with multiple stock indexes printing new all-time highs. The dollar has also seen some weakness this week in the direction of the long-term trend. Commodities markets remain mixed, but strength has been seen in multiple markets, particularly metals, where a couple of breakouts could be setting up this week.

Stocks

The Nasdaq 100 has potentially completed the breakout from the running wedge that we wrote about last week which gives upside targets in the region of 300 points higher to circa 6400. This week’s high is a new all-time high for the Nasdaq 100.

The S&P 500 also made a new all-time high this week continues to grind higher with relatively narrow daily trading ranges. The trend must be considered bullish as long as the lows of this month hold. The weight of the evidence is still bullish, but there are a couple of negative factors. Firstly, there is bearish divergence between price and RSI, which indicates that bulls are losing momentum. The second negative is that volume is decreasing. Average volume is now at its lowest level since the summer doldrums in early August.

The Nikkei has been supremely bullish, easily clearing recent resistance to trade at its highest level April 2000 basis the continuous back-adjusted chart. This is a very bullish development which also has technicals lining up to support the bullish stricture on monthly, weekly and daily timeframes. On the daily chart, the price has reached a rare four standard deviations above fair value and volatility is getting elevated, so we may see a period of consolidation as the market digests recent gains. However, the longer-term view can be nothing other than bullish for now.

The Dax also made a new all-time high this week, but price action is fair from convincing with multiple small bodied/doji candles appearing on the daily chart accompanied with bearish momentum divergence and a narrow trading range. The Dax is likely to be the first to breakdown on any weakness.

Commodities

The metals markets appear to be kicking up the pace again as all markets in the sector have rallied this week with Palladium and Copper leading the way higher. Both are poised to test resistance and potentially breakout this week. Silver, which is the weakest of the metals markets that we trade at LS Trader and is the only one still in a long-term downtrend is showing signs of strength and may rely further to test trend-defining resistance in the coming week or so.

Lumber has had another bullish week and exceeded our long-standing target. This week’s high is Lumber’s highest print since September 2004. We now move longer-term targets higher towards 461.00.

Currencies

The dollar turned lower again this week, moving back in the direction of the prevailing long-term downtrend. However, the market remains back within a trading range against the majors, and no breakouts are imminent, although there are a couple of markets that could breakout this week if we see an increase in volatility.

Interest rate futures

Interest rate futures have rallied this week, keeping the long-term uptrend intact in the 5 & 10 Year T-Notes and the 30 Year T-Bond. The latter could still break the neckline of a potential head and shoulders top over the coming weeks and complete a change of trend to down, but that position is not confirmed until the neckline is broken.

The UK Long Gilt and 3 Month Eurodollar, the two markets in this sector that are in long-term downtrends, continue to consolidate just above recent support. Volatility has been declining in both markets, which leans more towards mean reversion that further trend weakness, but for now both markets remain below resistance.

Good trading

Phil Seaton

LS Trader

Weekly Update – 8 October 2017 – LS Trader

Global stock markets remain bullish. US stock indexes made new all-time highs this week once again. The Dax also made a new all-time high. The dollar continues to rebound from the steep sell-off which has been in place since the beginning of the year and may correct higher against the prevailing long-term downtrend.

Stocks

From last week on the Dax: “All-time highs are in range and a change of trend and break out to new highs could be seen this week.” The Dax did breakout and printed new all-time highs, but price action has so far seen little in the way of follow though and is not entirely convincing. Volume remains below average.

Also from last week: “The Nasdaq 100 dropped below its 50-day MA on Monday but recovered that level by Wednesday and may now have another go at all-time highs.” The Nasdaq 100 completed the recovery and made new all-time highs as expected. The current formation is a rising wedge, but a breakout through the top would be bullish and complete a running wedge with targets around 300 points higher to circa 6400.

The S&P 500 continues to lead the way higher, making new all-time highs daily until Friday saw a small inside day. The Nikkei reached its highest level in over two years.

Commodities

Gold has seen continued weakness through to Friday. The market had fallen below its 200-day moving average on Monday but recovered to close just above it on Friday. The long-term trend is still up for Gold, but the RSI has turned bearish this week after a breach of bull market support at 40.

From last week on Lumber: “Friday’s candle showed some weakness, but if the market can shrug that off early next week we may see a test of the April 2017 high.” Lumber did shrug off short-term weakness and came very close to the April high. The trend remains up.

Currencies

The dollar has continued its recent recovery since the low in early September. The long-term trend, for now, remains against the dollar but there are some signs that may be changing. The dollar index has had a daily close every day this week above its 50-day MA, and the average is starting to slope slightly higher. The RSI has also broken above the 60 level for the first time since March, although with a read of 61.44 this is not decisive enough to call it a range shift to bullish.

The New Zealand dollar, which crossed and closed below its 200-day MA this week, has been the first to complete a downside breakout and change of trend. The RSI also declined back below the 40 level.

The Japanese Yen has also seen considerable weakness in recent weeks and could also complete a change of long-term trend soon.

Interest rate futures

Interest rate futures weakness continues, and the longer-term markets are heading down towards support. There is a potential massive head and shoulders top pattern forming on the weekly chart of the 30-Year T-Bond. This pattern will require a close below the neckline. The height of this pattern is approximately 30, measuring from 170 to 140. This would result in downside targets from the eventual breakdown point, currently around 147, down to 117, a huge move.

However, it’s hugely important to wait for the confirmation as the neckline can often act as support. What’s interesting here is that level coincides with LS Trader’s proprietary long-term trend filter where a breakout would also complete a change of long-term trend to down.

Good trading

Phil Seaton

LS Trader

Weekly Update 1 October 2017 – LS Trader

The S&P 500 made a new all-time high yet again this week as the bull market in global stocks continues. Other indexes lag behind the S&P 500, but all are making progress back towards a test of their respective recent highs.

The dollar continues to show signs of a reversal in the making, at least in the short-term. The commitments of traders (COT) data, discussed within the currencies section shows an interesting multi-year development.

Stocks

The S&P 500 continues to lead the way for the stock indexes that we trade at LS Trader. In last week’s update, we mentioned key support at change of polarity support from the prior highs and that support level held on Monday. The market rallied through the rest of the week and made a new all-time high and new all-time closing high on Friday. The RSI reach 70.96 on Friday, its highest level since March.

The Dax had a strong week with the RSI (weekly) breaking back above the 60 level. All-time highs are in range and a change of trend and break out to new highs could be seen this week.

The Nasdaq 100 dropped below its 50-day MA on Monday but recovered that level by Wednesday and may now have another go at all-time highs. The RSI remained above the 40 level, which is bull market support, during the recent weakness, and the long-term trend remains up.

Commodities

Commodities markets have seen mostly weakness this week, with energies and metals seeing considerable declines. There have been few exceptions. One of these is Lumber, which rallied above 400 for the first time since April. Friday’s candle showed some weakness but if the market can shrug that off early next week we may see a test of the April 2017 high.

Gold and Silver both continue to decline. Silver, in particular, looks weak, and having been the sole metals market not to be in a long-term up trend at present is the most likely to break out to the downside.

Currencies

Following the exit of the Euro and Dollar Index positions, only the British Pound remains as an open trade. Even the Pound, which is currently the strongest currency against the dollar in terms of near-term trend has seen weakness this week, but so far support continues to hold.

The dollar index reached its highest level since the middle of August. The dollar index had fallen sharply this year, having declined from 103.81 back in January, to the September low at 90.99, so the bounce has been expected. The rally this week took the index back above its 50-day MA for the first time since April.

This turnaround in the dollar has been expected for a couple of weeks, and we may see further gains for the dollar over the coming weeks. The Commitments of Traders Data (COT) data shows that commercials are now net long the dollar index for the first time since March 2014.

One thing that we have noted in recent weeks is the near-record commercial short position in the Euro on the COT data. Commercials are the most short that they have been since 2007. Often trends will resolve in the direction of the commercials, but not always. In fact, the last time commercials were this short the Euro rallied from around 1.37 to 1.60. This week’s breach of support broke the neckline on a small head and shoulders pattern, which adds more fuel to the short-term view of Euro weakness and dollar strength, both of which are moves counter to the long-term trend.

Interest rate futures

The 3-month Eurodollar broke support and completed a change of trend to down as we anticipated in last week’s update. The 3-month Eurodollar is the second of the interest rate futures markets to enter a long-term downtrend, joining the UK Long Gilt. The remaining three US interest rate futures markets that we trade at LS Trader remain in long-term up trends for now, but all have seen persistent weakness since the first week of September.

Good trading

Phil Seaton

LS Trader