Stocks and currencies have had an extremely volatile couple of days this week, with large swings up and down in numerous markets. However, none of these moves have changed the long-term trends, which remain down for stocks and mixed for the dollar. The long-term trend is also mostly still down for commodities, but we continue to see strength return to some of the commodity markets.
The stock markets have moved higher again this week but have seen some large and volatile swings, particularly on Thursday afternoon following Mario Draghi’s ECB rate announcement that seemed to throw the market a curveball. The Dax, in particular, was highly volatile, with Thursday’s trading range spanning some 602 points, followed by a 4.01% rally on Friday. Friday’s close right at the high of the day is bullish and suggests further strength next week, particularly if the RSI breaks the 60 level. If it does, we may see another test of the 10,000 level.
We wrote last week that the rally in stocks seemed like a bear market rally due to the declining volumes, and with the exception of Thursday’s high volume day, that trend has continued this week. Volume was sharply lower on Friday as the market took out the 2000 level on the S&P 500. The RSI on the S&P 500 remains bullish, holding above the 60 level, but the long-term trend remains down. The presence of a negative reversal setup where price makes a higher low and RSI makes a higher high over the same period indicates that the trend is still down and that we could see a turn lower again
For now, the long-term trend remains down across the sector, and it will still take considerable further rally for that to change.
Note that we are now trading the June contract in stock indexes.
Gold rallied to a new high for the current move on Friday before reversing and ending the day lower by 1.7%. Bearish divergence is evident on the chart so we may see a bit more of a correction before the uptrend resumes. For now, the RSI continues to hold above the 60 level, which is bullish.
Copper once again tested its 200-day moving average but was unable to break through. There the same chart formation in Copper that is present on the S&P 500, known as a negative reversal, where we have a new momentum high on the RSI but a lower price dating back to the September high. This is typically very negative and suggests that Copper may turn significantly lower.
The currency markets had a hugely volatile week, particularly on Thursday. As mentioned above, that was due to the confusion of the markets following the ECB meeting. It seems that Mario Draghi’s move to negative 0.4% deposit interest rates and an increase in QE from €60 billion per month to €80 billion per month was intended to crash the Euro, which initially it did. Then we saw a huge reversal as the Euro soared higher.
One can only conclude that the markets decided that the ECB had gone ‘all in’ on the move and that there would be nothing else coming in the future, so the Euro strengthened. Whether that turns out to be correct, of course, remains to be seen. Any turn in the tide in financial markets to risk-off will send the Dollar higher and the Euro lower irrespective of what the ECB does.
The Euro’s move was of course inverted on the dollar index, which ultimately ended back below its 200-day moving average and not that far above long-term trend-defining support. For now, the long-term trend remains up for the dollar index, but with the RSI now clearly below bull market support, further weakness may lie ahead.
Interest rate futures
Interest rate futures have continued to decline and this week saw us exit the last of our long trades from this sector, the Long Gilt, which was a very profitable trade in spite us giving back some profits after the market topped out. For now, the long-term trend is up across the sector but continued weakness has taken the markets below their 50-day moving averages and heading towards a test of their 200-day moving averages.
Perhaps more importantly than that, the RSI has fallen through the 40 level, which is bull market support. The failure of this level to hold indicates further weakness ahead and a possible change of long-term trend to down over the coming week or so.