It’s been another active week in the markets that has seen volatility continue to pick up. This was amply highlighted by a rise in the VIX to levels not seen since the Euro crisis in 2012. In last week’s update we wrote: “The Vix made a huge rally on Friday and for the week, reaching levels not seen in almost a year. This indicates that volatility and fear are returning to the markets having both been absent for long periods.” The rise in the VIX this week also indicates a return to fear amongst market participants, but this was somewhat reduced by the end of the week following a 2-day recovery rally in stocks.
From last week on stocks : “The past week has seen considerable weakness in stocks, which continue to look as though they may have already posted significant highs and are now headed towards lower levels.” Also from last week on the S&P 500: “The RSI broke through the 40 level and a test of key support at 1882.25 now looks likely. Should that level give way, we can look another 40-odd points lower towards critical trend-defining support.” 1882.25 did give way early in the week and the S&P 500 sold off sharply, easily shedding the further 40 points that we expected, in fact falling all the way to 1813 before bouncing higher. The recovery rally from Thursday’s low completed a morning star bullish reversal pattern, so stocks may rally a bit further next week, but the long-term trend is now down.
The Nikkei at one point this week shed another 690 points, dropping over 2000 points in just 3 weeks. A bounce higher was therefore not unexpected. The long-term trend is still up but the recent decline has done significant technical damage and a change of trend to down could be confirmed soon.
The Dax fell 415 points through to Thursday’s low before bouncing higher in line with other global stock indices. The strong rally here also completed a morning star reversal pattern so we may also see some further strength here early next week. However, the long-term downtrend is now well established and lower levels should be seen over the coming weeks.
Big moves have been seen once again in the energy sector. Crude fell for a third straight week and printed below the $80 level for the first time since June 2012. A recovery has since been seen but the trend remains down, as indeed it does for all the markets in the sector. Brent crude fell to lows not seen in almost 4 years. The RSI in Brent fell to a rare low level of 11.5 on Wednesday, so the bounce seen since then is not really too surprising. However, the trend here is still very much down and a move to new lows cannot be ruled out. This has so far been an extremely profitable short trade for the LS Trader system and we continue to ride the trend lower.
The critical shelf of support that has been holding natural gas up for the past 3 months finally gave way as expected. This level should now provide resistance if the newly established downtrend is good.
The currency markets have spent much of the week consolidating, although some of the majors have made some moves during the week before ending back near where they started. The US dollar rose to new highs against the Canadian dollar, reaching levels not seen since 2009. Following the new high print a correction has been seen, but the move higher may resume from near current levels.
Cable fell to its lowest level since November last year before also correcting higher during the second half of the week. The RSI has recovered back to 45.72 at daily chart level and if the downtrend is to remain intact near term, we’ll look for the RSI to run into resistance between the 50-60 level.
Interest rate futures
Interest rate futures futures rallied sharply through to Wednesday’s high before giving back much of the week’s gains by Friday’s close. The RSI on the long bond reached its highest level since May 2012, which was part of the run up to the all time high posted in July of that year. The extent of the reversal seen this week puts some question mark against whether we will still see a test of the 2013 high. The long-term trend is up across the sector.
The weakness seen this week in the Euribor was sufficient for us to exit our long trade that had been open since 11th April. That had been a good profitable trade for the LS Trader system, in a market where the volatility has all but dried up again even for the contracts that are further out on the curve.