Stock market weakness continued this week as volatility continues to expand across multiple markets. Volatility has reached extreme levels in the stock markets, and a new period of higher volatility in stocks appears to have arrived.
However, the extremes seen over the past week or so are likely to decrease somewhat over the coming weeks but remain at elevated levels compared to what has been seen over the past year or so. The period of low volatility, which has been deadly for trends in most markets, appears to be behind us. A new period of large trends is on the horizon in many markets.
Stocks continued lower this week and broke support, as we suggested would happen in last week’s update. The weakness seen so far is a correction, and that will remain so until a change of trend is completed. However, price action does have an impulsive look to it, so if weakness persists, change of trend-defining support could be tested and broken.
Bullish sentiment has continued to decline and fell as low as nine this week, which is actually 1 percentage point lower than the low at the time of the US election, from which the massive rally was launched.
On the S&P 500, the price fell below the 200-day moving average on Tuesday and Friday, but on both occasions, a bounce followed shortly afterwards. Tuesday’s low at 2529 was matched almost exactly on Friday with a low at 2530.25. Both times strong buying was evident, as can be seen by the long lower wicks on the daily charts, a sign that the lows are being rejected. For now, the long-term trend remains up but last week’s lows will likely need to hold. If they are broken decisively, a change of long-term trend to down will come within range.
From last week: “A change of long-term trend to down is within range on the Dax and could complete later this week if weakness persists.” The Dax, which has been the weakest of the four stock indexes we trade, did complete the change of trend to down this week. However, as with the S&P 500, the lows were strongly rejected on Friday. Last week’s low will be a key level to watch this week if weakness resumes.
Although the focus of many has been on the stock markets, the energy markets have also collapsed and broke support this week as expected. This has brought to an end some highly profitable and long-running trends in the energy markets, at least for now. As with stocks, the long-term trend is still up.
The metals markets have also seen weakness, but not to the same degree as stocks or energies. Silver, which is the weakest of the sector, could resume its long-term trend to down soon. Copper and Palladium both have changes of long-term trend coming into range.
From last week: “Corn is on the verge of a change of trend breakout to up, which could complete this week.” Corn did complete the change of trend to up, but so far without follow through. Soybean Meal has seen bullish price action and could complete a bullish trend change this week.
The Euro declined this week as the dollar’s recovery continued. However, the long-term trend is still very much up for the Euro and based on the January effect we’re looking for the January low to hold for the year. The long-term trend for the dollar remains down in spite of recent weakness. We could see breakouts this week against the dollar for the Japanese Yen and Swiss franc.
Interest rate futures
From last week: “The long-term trend remains down across the sector and is likely to continue so for a considerable time, even if we do get the expected short-term bounce.” The expected bounce did materialise, and although it was a large bounce, it did not damage the longer-term trend, which remains down. We could see this sector resume the downtrend as soon as this week.