As April moves into the last two trading days, many will be contemplating the old adage of sell in May and go away. On a seasonal basis, the best six months of the year for stocks end on Tuesday 30th. However, seasonal tendencies are just that, tendencies, and they are far from reliable. Of far more import is the technical set up, and to a lesser extent, extreme levels of bullish sentiment, which still remain in play. Extreme levels of sentiment often compliment key market turning points so although the technical picture is still bullish for stocks, a reversal cannot be ruled out.
Based on LS Trader’s proprietary trend analysis, the long term trends are still up for stocks, bonds and the dollar and down for commodities.
The S&P 500 continued higher this week with the key factor in this market being that key support is still holding. As long as the key support level holds then we must favour the bullish scenario and a push to new all time highs. However, should support fail then the bullish scenario could quickly unravel with a swift move back to 1477 basis the June contract.
The Nikkei reached our upside target of 14000 but has run into resistance. A bearish engulfing pattern was printed on the daily charts on Friday. This 14000 level, which is psychological round number resistance, is now key to this market. The reason this level is significant is that the Nikkei is very highly correlated with they Yen, and the Yen is also struggling to hold parity with the US dollar. Basis the June contract, USD/JPY reached 9993 and has since failed to clear parity in several attempts. In line with the Nikkei, USD/JPY was lower on Friday. If USD/JPY can clear 100 then this would be bullish for the Nikkei as a weaker Yen is bullish for Japanese stocks. However, if 100 holds then both markets will likely move lower in tandem. The trends for the Nikkei and USD/JPY have both been profitable for the LS Trader system, and the system continues to ride these trends at present and will continue to do so until support is breached.
Last week we wrote that a bounce and increased volatility can be expected in the metals and that the trends were down. This week we did see a large bounce in the metals but nowhere near sufficient to change the long term trend, which still remains firmly down. Gold ended the week higher by 4.16% and in spite of the rally from the lows posted on the 16th April, which has been impressive, lower prices may yet follow. If the bearish scenario is still playing out and a move to new lows is on the cards, then gold will need to push lower almost immediately next week, otherwise a continued rally to test the underside of the support shelf that held this market up for so long may be tested.
Silver’s 2-week rally has been less impressive than gold and the downtrend remains firmly intact for now, although if gold does continue higher then we can expect higher silver prices too. Copper prices did narrowly fall to new lows for the current move and the LS Trader system remains bearish the sector.
The dollar index has sold off during the past 3 days in a counter trend move and may continue a bit lower near term. However, the uptrend remains intact as long as 8178 holds on the June contract. Things are amiss for the dollar below that level.
The surprise move for the week came from GBP/USD, which put in a decent rally that took cable above the 38.2% retracement of the decline from the start of the year. However, this move was not confirmed by the Euro or the Swiss franc, so may be short lived. Possibly a continuation slightly higher from here to the 50% retracement levels before a resumption of the longer term downtrend.
The U.S dollar did have another go at parity against the Yen, with Monday posting a high at 9987. However, once more this key level held firm and the longer it does so the more likely the market is to reverse. As written previously this level represents the 50% retracement area of the decline from 2007 on USD/JPY as well as the psychological parity level, so we can continue to expect strong resistance, and possibly a pull back.
Interest rate futures
The long bond advanced by 0.51% for the week and as we wrote last week may now target the 150-153 area. The 5-year note still looks as though it has further room to the upside and may yet reach 125, although the trend is clearly mature. The trend for the sector remains up.
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