From last week: “We are possibly at or near to a sentiment extreme. This is evident by the cover of The Economist this week, which has a picture of stampeding robotic bulls for tech stocks. Therefore, we are possibly near the end of the trend and will likely see support tested this week.”
The sentiment extreme cover of The Economist marked the top to the day. The market collapse since then has been huge. Friday saw a bullish one-day recovery rally where the market moved sharply lower and then reversed, leaving a long lower shadow, and closing in the top third of the bar. This would suggest that we may see further strength if Friday’s high is taken out, before additional weakness back to new lows. If last week’s lows are taken out, the long-term trend will turn down.
Most commodity markets sold off sharply this week, with metals and energies making big moves to the downside. The sell-off in gold appears to be counter-intuitive during a market crash, but weak hands sell their gold holdings to meet margin calls and offset their equity losses. This often happens in a crisis initially, as the weak hands get taken out. Once they are out, only the strong hands remain, and they bid the market up resulting in the expected behaviour.
The dollar sold-off along with stocks, with the Dollar Index closing lower for six consecutive days. The long-term trend, however, is still up for the dollar.
Interest rate futures
Interest rate futures rallied across the board, making new highs in the process. Interestingly, as stocks corrected higher on Friday, interest rate futures did not give much back and made a strong close. The long-term trend remains up for futures.