Weekly Update 16th March 2014 – LS Trader

Stocks were unable to push to new all time highs this week and ended the week lower. The US dollar index dropped to its lowest level since October last year and commodities have been mixed. Interest rate futures were all higher.

Stocks

For the first time in a few weeks, stocks failed to reach new all time highs. The failure to do so led to a reasonable sell-off. Whether this is the start of a new wave of selling remains to be seen. So far the long-term trend according to our proprietary indicators remains up for 3 of the 4 indices we trade. The Dow, which is one that we don’t trade at LS Trader but is still one that we monitor from an intermarket analysis perspective, closed lower for 5 consecutive days; something that it has not done for almost 2 years. It is also worth noting that, as we have covered in recent newsletter issues, the Dow has lagged the S&P 500 and the Nasdaq 100 and has not broken to new all time highs (or multi-year highs in the case of the Nasdaq 100). This is not a bullish set-up.

The Dax broke through key support, changing the trend to down and being the first of the 4 stock indices that we trade at LS Trader to do so. The Nikkei looks likely to be next, but the 2 US markets are comparatively a long way from testing key support. Considerable weakness over the next few weeks will be required for that to change. The Nikkei has a strong shelf of support at not far below current prices, which if broken, could lead to a substantial sell-off. The RSI has already broken through bull market support and suggests prices may complete the break of support. As ever, only price action can confirm this and until such a move occurs, the trend remains up.

Commodities

Last week we touched on the divergence between gold and silver; two markets that are normally highly correlated. This week saw gold breakout to the upside as expected, but silver still lags behind. Gold and palladium are both in long-term uptrends, but the trend for silver remains down. Copper broke through key support this week to confirm a change of trend to down and subsequently broke sharply lower to its lowest level since July 2009. Should last week’s low be taken out there is a long, long way down before the next level of support is found. Copper, as long time readers will know is known as Dr Copper for its economic indicator status. Copper’s break lower shows that all is not anywhere near as well in the economy as many would have us believe.

Lean hogs continue to be the main big winner for the LS Trader portfolio at present, having this week added another 630 points to the rally that began a month ago. Upside momentum here is very high, with the RSI reaching 89.38 on Tuesday this week. This has since dropped back to 86.33 and suggests that we may at a minimum have a bit of corrective price action before the rally extends further. It is rare for the RSI to push much beyond 90, but it can and does happen.

Currencies

During the past couple of weeks we have written about the fact that the breakout to new highs in the Euro has been unconfirmed by new comparative lows for the dollar index. These 2 markets are highly inversely correlated due to the Euro making up 57% of the dollar index. This week saw the Euro rise to new highs again, but the index once again fails to reach new lows. That said, the index fell to within 4 points of its 2013 low basis the continuous contract, so that is clearly a level that can still be broken.

Interest rate futures

The long-term trend for interest rate futures remains up and with all markets in the sector moving higher this week, key resistance levels could be tested. Interest rate futures, in spite of conventional wisdom that says bond prices should fall due to Federal Reserve tapering, remain in long-term uptrends and all the markets in the sector rose this week. The long bond came within a few ticks of testing recent resistance and it could be only a matter of time before interest rate futures break higher, particularly if stocks continue with weakness that began last week.

Good trading

Phil Seaton

LS Trader

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