The past week has seen stock markets sell-off, the particular weakness being seen in U.S. stocks on Friday. Interest rate futures have risen once more, and may go on to test their recent highs again, and the dollar has been weaker, highlighted by a four-day decline in the dollar index to end the week. The long-term trends all remain intact as before and are still up for stocks, interest rate futures and the dollar. Commodities remain for the most part in long-term downtrends. Until there is price action to the contrary, we expect the prevailing long-term trends to remain in effect once this short-term consolidation period ends.
Global equities were weaker over the past week and this weakness even spread to the strongest of the indices we trade at LS Trader, the German Dax. The Dax this week failed by 3 points to make new all time highs and turned over, before accelerating lower on Friday. This led to a move through short-term support and resulted in the system exiting the trade. It was, however, a highly profitable trade, and we only gave back a pretty small amount of profit in the process. The trade was originally entered long back on the 16th January, at a level of 10159 and exited at 11865, for a profit of some 1706 points, an excellent move.
Last week we suggested that 60 was the key level on the S&P’s RSI and that if the RSI broke above 60 it would argue for new all time highs. The 60 level held, with a high for the week at 58.86, which kept the RSI in the bear range, and the market subsequently turned over. It was a similar story in the Nasdaq 100, where the RSI also failed to reach the 60 level.
However, in spite of the weakness seen in global stocks this week, it should be noted that the long-term trends are all still up, and further price action to the downside through longer-term support levels will be required for that to change. It is therefore at this moment in time premature to rule out a further rally and new highs. This view is further bolstered by the fact that the price action since late February has been sideways, and choppy, typical characteristics of a correction and a pause before the prior trend resumes. Only price action can confirm a change of trend, so until we see a break of major support, the focus remains to the upside.
Energy markets have been strong this week, but remain in long-term downtrends. However, the RSI on crude oil has this week broken through bear market resistance at the 60 level for the first time since June last year. The market has though, been in a sideways range since the beginning of the year, with this range spanning from the lows around $45 to last week’s high. It is possible that this is a basing pattern and that we may see further strength from here, but it will take considerable further strength to change the long-term trend to up, and at this stage we don’t see that happening. It is more likely that recent strength is a corrective rally in a larger downtrend.
Natural gas remains the weakest market in the sector, but may be due another test of resistance in the coming days. Here the RSI remains in the bear range, and even last week’s rally was unable to take the RSI much above 50. Should resistance hold, we can still look for new lows in this market.
The dollar index began the week moving higher to reach its highest level in almost a month, before moving lower and selling off for four straight days. There is short-term support for the index around 96, and a further support zone around the 94-95 level. There are, therefore, plenty of areas to support the long-term uptrend and to form a platform for further strength. The RSI, which often moves ahead of price, remains in the bull range, which we define as between 80 and 40. It will be interesting to see if the bull market support area on the RSI at 40 holds this week.
Interest rate futures
The long-term uptrend in the interest rate futures sector remains intact, with a sharp reversal higher seen early in the week, which saw the 5-year T-note narrowly hold on to support. A 5-day rally followed, which took the note back to within a few points of its recent high. Similar price action was seen in the 10-year note and the 30-year bond, but the latter was a little weaker in its rally until a strong move was seen on Friday. If we see further stock index weakness, the interest rate futures sector may benefit sufficiently to see new highs.