In a week that has seen the global financial crisis come to the fore once again, stock indexes failed to clear resistance and headed sharply lower as the dollar moved higher. Commodities were also sharply lower almost across the board and these are trends that are likely to persist for the time being, although nothing ever moves up or down in straight lines and there will always be corrections and bear market rallies along the way.
The long term trend remains down for stocks indexes and is now down for most commodities but is now up for the dollar against nearly all of the majors.
In last week’s update we wrote “So far this year the seasonal September weakness has not come to the fore but we may yet see the September selling rear its head. The S&P 500 is currently flat for the month so if the record of being t he worst month of the year for the S&P 500 is going to pan out this year there will have to be some considerable weakness before month end from here. For now it looks as though resistance around 1220 may be tested and the market’s reaction at that level will be a good indicator of short term action.” Short term resistance at 1220 was nearly tested before a steep sell off returned the indexes to bear market territory.
The VIX soared 33.15% for the week, bouncing higher from the support area just above 30 and closed the week out at 41.25 as fear returns to the market.
The Dax did not quite fall to the prior week’s lows at 4971, bottoming for the week at 4980 but we may still see a move towards the next support target around 4600 a bit further out and the trend still remains very much down.
Last week we wrote “Further gold weakness has increased the possibility that w e have seen a major top as indicated by the possible double top formation. If dollar strength does resume then this would add further pressure to gold”. The double top pattern was confirmed this week with a breach of the low point between the 2 highs, which in this case was the low of the hammer pattern at $1705. We can therefore subtract the low of $1705 from the high of $1923 to give $218, which when subtracted from the low at $1705 gives a target of $1487 for Gold. For now though the trend remains up for gold although it is down for the other metals in the sector.
Last week we also wrote “Crude continues to grapple with the resistance at $90 that we have been writing about for several weeks and appears as though it may be winding up for a decent move in the not too distant future. The short-term range on Crude therefore still spans some $15, from $75 to $90.” Further failure to clear $90 led to a big move as suggested, a decline of 9.45% for the week. The next targ et will be the $75 and the $70 level, although steeper declines may follow further out.
The dollar resumed its recent uptrend and continues to be the beneficiary of the current global financial crisis and its perceived safe haven status, which is somewhat ironic considering that it is effectively a fiat currency. But as we have written many times before, it is only the fact that it is still the world’s reserve currency that it has safe haven status. The other safe haven currencies of Japan and Switzerland are both being devalued by their respective central banks, leaving the dollar as the only viable alternative, and it will likely continue to rise as the global economic crisis deepens over the coming months.
Interest rate futures
The trend remains bullish for interest rate futures but we still may be a pproaching a top. 10 year yields will likely find support around 1.70, which is pretty much the high price point equivalent on the charts seen last week and we may see a move lower from there. We still see interest rate futures as being a likely candidate for a very steep decline over the next few years.