In last week’s update, we noted: “Many markets remain in a neutral trading environment, but there are signs that multiple markets are beginning to awaken and that we could see some breakouts, volatility and price expansion over the coming weeks.”
A few markets have started to awaken, and we did get some breakouts during this past week, and there are likely more ahead. This week sees the two-day FOMC meeting begin on Tuesday, which generally increases volatility for a day or two.
From last week on the S&P 500: “Price went over 3.618 standard deviations above fair value on Wednesday, which is the first time that has happened since October 2016. Volume has since declined with price so it’s possible that Wednesday was a blow off top and that we may see some short-term weakness ahead.”
We did see the expected short-term weakness as price mean reverted to exactly fair value, 2351, before turning higher again. This resulted in the first bear body (the close of the week being lower than the open) being printed on the weekly chart in eight weeks. The higher volume seen on Thursday and Friday is due to the expiration of the March contract and rolling to June, not due to fresh buyers.
That weakness seen in the S&P 500 was less evident in the Nasdaq 100, where although we saw prices pull back during the middle of the week, the market closed up for the week, as it has for every week so far in 2017.
The long-term trend remains up for global stocks. The Nikkei is in a holding pattern just below the 2017 high, with the possibility of a breakout which would take the market to its highest level since 2015. Both the Nikkei and the Dax continue to lag their US counterparts
From last week: “The Crude Oil markets remain in an incredibly tight range as volatility continues to compress in a classic line market environment. The average true range in Crude has almost dropped in half since December. When this market eventually breakouts out, the resultant move is likely to be large indeed.”
We’ve been writing about the volatility compression in Crude Oil for several weeks and stated that the resultant move would likely be large. We got the breakout this week and a large three-day move. However, the move has not yet been sufficient to take Crude out of its wider trading range, but that may follow over the coming weeks.
Gold and Silver moved sharply lower this week as the counter-trend rally from the mid-December low continues to unwind. The long-term trend remains down for both precious metals.
The currency markets remain in a random, two-way rotational environment with contracting volatility, which is a long-winded way of saying that there is no trend in the short-term. These markets continue to trade mostly sideways, as they have for much of the year to date. There was a reasonably large daily move in the EUR/USD on Friday, with a similar move in the opposite direction in the Dollar Index. The long-term trend remains in favour of the dollar.
Interest rate futures
From last week: “We’ve been writing for weeks that the recent strength seen in interest rate futures is counter-trend and that the long-term downtrend should eventually resume and prices fall below their December lows, and that remains the case in all the U.S. interest rate markets. The 3 Month Eurodollar has already exceeded that low and the longer-term markets may follow suit soon.”
Interest rates continued their decline this week and remain in a long-term downtrend. Friday did see a bit of strength, but with the trend being down, the long-held target of a test of the December lows remains on target.