Weekly Update 20 July 2014 – LS Trader

The trend change that we wrote about last week in the Euro finally happened, but the move has yet to be confirmed by a breakout higher in the dollar index. Should the index break higher then we will likely be due a period of dollar strength and weaker commodities. Such a move would also likely put some pressure on the stock indices, which so far continue to be resilient. All attempts at pushing stock indices lower have so far been met with buying, as illustrated on Friday.

Stocks

The S&P 500 came within a quarter of a point of its all time high, backed off and then recovered again on Friday, keeping the longer-term uptrend very much intact. Should the market be able to clear resistance at the current all time high, a test of the major psychological 2000 level may yet follow.

The Nasdaq 100 posted new multi-year highs as expected, then sold off before making a strong recovery on Friday. Here too the uptrend is very much intact.

From last week on the Dax “For now the trend remains up but the extent of current weakness may indicate that the top is in, and that following a likely bounce, weakness may resume.” We got the expected bounce and subsequent weakness, but so far that weakness has been unable to push through the prior week’s low, which now looks to be quite a key level for the medium term. The RSI continues to move back lower and may fall back below 40 in the coming days, which when accompanied by a break of support should point to lower prices in the near term.

The correlation between the Nikkei and USD/JPY remains intact, and both markets continue to hold above ley support. The current chart pattern and RSI indicate higher levels for the Nikkei ahead, which would argue that support will hold on USD/JPY. Time will of course tell.

Commodities

The CRB commodity index is not a market that we trade at LS Trader, but it is nonetheless a good barometer for overall commodity prices. This week the index fell to its lowest level since February, and on the basis of LS Trader’s proprietary trend analysis, has this week confirmed a trend change to down. This suggests that in the longer-term commodity prices will continue to weaken overall.

However, the RSI fell to 19.18 this week, which is fairly overextended to the downside. Therefore a bounce higher, which may coincide with short-term dollar weakness as discussed below, may be seen in the near-term before longer-term weakness takes hold once more. Over the coming weeks we may see the CRB index fall lower to test major support at 500, and possibly move below that level, which would be levels not seen since 2010, before the big top in commodities in April 2011

Currencies

The two key markets in the currency sector at present are the Euro and the dollar index, as we have covered in recent weeks. The Euro fell below key support on an intraday basis on Friday but was unable to hold below the support level. This price action argues for a bounce higher over the coming days (short-term dollar weakness) before the downtrend resumes. As of yet the break lower in the Euro is unconfirmed by a breakout higher in the dollar index.

The RSI’s failure to break above 60 on the Euro on the 30th June argues that a range shift to down has been completed and that the RSI should stay below 60 for quite some time, which argues long-term for lower prices. At the same time, the RSI reached 59.87 this week on the dollar index, so a move above 60 would be a bullish event for the index and argue for higher prices.

Interest rate futures

From last week “Interest rate futures rallied this week, with the 30-year T-bond uptrend remaining intact and possibly targeting the late May high.” The 30-year bond did rally further and exceeded the May high, but was unable to close above that level. The bond will need to break back above Friday’s high soon to keep the short-term focus towards higher prices, or a correction may follow. Both the 5 & 10 year T notes have both been unable to clear resistance so far, which adds to short-term downside pressure on the long bond.

Good trading

Phil Seaton

LS Trader

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