The past week has seen Donald Trump inaugurated as the 45th President of the United States. It will be interesting to see what impact that and his policies have on the financial markets over the coming years. As of now, the long-term trends are up for stocks and the dollar, down for interest rate futures, and mixed (but starting to turn bullish) for commodities.
The S&P 500 failed to breakout to new all-time highs again and remains in a very tight range. This range is extremely tight and is unsustainable, meaning that a breakout is going to come, one way or the other. The all-time high print remains at 2277 basis the March E-mini contract. The Nasdaq 100 did make a new all-time high on Friday, but both Thursday and Friday’s candles show indecision and rejection of the highs.
The FTSE 100 posted a new all-time high on Monday at 7297, which coincided with the highest ever volatility reading on the daily chart according to our proprietary algorithms. When such extreme readings occur, the odds strongly favour mean reversion to fair value, which is exactly what happened. Fair value was hit almost exactly at Friday’s low.
It will be interesting to see whether this level acts as support, (in long-term uptrends, reversion to fair value is typically where large fund algorithms kick in for them to add to their long position) or whether price slices through as volatility continues to compress. If volatility continues to compress, we may see further price weakness to around the 7000 level. The trend remains up.
From last week: “several commodities are showing early bullish signs. Soybean Meal and Soybeans are of particular interest.” Both of these markets made thrust breakouts on high volume and volatility increased on both markets before a bit of weakness at the end of the week. Oats also broke out, crossing the 200-week moving average and reaching its highest level since late 2015.
Corn is also right at the breakout level, closing just above its 200-day moving average for the first time since June. Volume and volatility metrics both support further advance, so we may see the breakout completed next week. If so, we can look for 390 as the next target.
The currency markets remain in a random two-way rotational phase and continue to correct against the primary trend, which continues to favour the dollar. The dollar index moved below the 50-day MA, but price remains well above its 200-day MA, and the trend is up. The RSI is flirting with bull market support at the 40 level.
The January effect that we have written about recently, where there is a strong tendency in the historical data for the Euro to make its high or low for the year in January, continues to point to the 1.0347 print on the 3rd of January as the low for the year. However, I remain unconvinced.
The recent corrective rally in EUR/USD has been on declining volume and volatility, which is characteristic of a correction and not a new trend. Price is finding resistance in the region of the 50-day MA and remains below the 38.2% retracement of the decline from the November 2016 spike high. That price level is 1.0751. Friday’s close was 1.0730. Based on the current technical picture displayed by the charts, I expect resistance will be found somewhere between the 38.2 and 50% (1.0868) retracement levels of that decline before the market turns lower once more. We shall see. Either way, there is currently no position in this market.
Interest rate futures
Interest rate futures found resistance as expected in the vicinity of the 50-day moving average, which was almost exactly to the 38.2% retracement of the decline from the November spike high. Having opened the week higher, interest rate futures traded lower throughout the week.
On the 30-Year T-Bond, price remains above the 50-month moving average as it has since July 2007. Currently, that long-term MA is at 147.20. Given that this MA has been the controlling MA for almost ten years, significant support can be expected in that area.
The trend remains down for the sector and price may yet turn lower and resume the downtrend in the next couple of weeks.