Weekly Update 3rd August 2014 – LS Trader

From last week’s update “The Euro has fallen to new lows for the year and the dollar index came close to making an upside breakout, which may follow this week. Should the dollar index breakout and continue to rise, that may put some pressure on stocks around the time of the 2000 level being attempted on the S&P 500”. The dollar index did continue its rise and completed a successful breakout; the Euro fell to new lows for the year and stocks sold-off sharply, all in line with expectations. For now the long-term trends remain intact, up for stocks and interest rate futures, mostly down for commodities and mixed for the dollar.

Stocks

For several weeks we have been writing about the 2000 level on the S&P 500 and suggested that should the dollar rise, a spanner may be thrown into the works around the time of an attempt at 2000. 2000 was not seen and this was the first week in a few where a new all time high was not seen.

From last week on the S&P 500 “On a short-term basis we do have an evening star pattern, which is a bearish reversal pattern, suggesting further short-term weakness.” That weakness was certainly evident this week as the S&P sold off drastically. On the weekly chart we have what is almost a key reversal pattern but for the fact that new highs were not seen. Friday’s close engulfed the lows of the past 7 trading weeks, so the price action has done considerable chart damage. The RSI has fallen below the key 40 support level, so basis the RSI the trend is now down, but as yet not confirmed by price action, as further weakness is still required for a change of long-term trend.

From last week on the Dax: “The RSI fell just below 38 where a bounce higher was seen in both price and RSI. Weakness has subsequently followed and another test of key support looks likely this week.” Key support was taken out and the RSI moved decisively into bear territory, ending the week at 28. The long-term trend is still up but that may change soon as the market looks set for a test of critical support in the coming weeks.

The VIX rallied sharply as the first signs of fear entered the stock market. The VIX rose to its highest level in 10 weeks and may continue to rise higher, particularly if stocks breakdown further.

Commodities

Last week we wrote about cotton and said that even though the market had become over-extended to the downside, that did not preclude further weakness. As long time readers will know, we don’t use the phrases overbought and oversold, because there is no such thing, and instead use overextended. Markets can remain overextended in either direction for long periods of time and the weakness in cotton, as well as in several other markets, particularly grains is ample proof of that.

Several commodities markets have made decent moves this past week, and it looks as though the seemingly endless period of quiet low volatility is at an end. Volatility has clearly picked up in several markets and sectors, including stocks, commodities and interest rate future. This bodes well for profitable trading opportunities over the coming months.

Currencies

Our downside target for the Euro remains intact at $1.3293 following this week’s declines to new lows for the year. A bounce was seen on Friday, which was not surprising, but the longer-term downtrend remains intact.

Last week on the dollar index we wrote: “The dollar index had a go at breaking resistance but has so far fallen short of completing the breakout. Such a breakout may occur during the coming week. Should the breakout prove successful, initial targets will be at 81.74.” Such a breakout did occur and the index rose to within pips of 81.74, but stalled at 81.66 and then moved lower, closing the week at 81.37. The trend is still up and the correction should ideally end above 81.00 where prior resistance should now become support.

Interest rate futures

The long bond rose to its highest level since 17th May this week at just a shade over 139 but was unable to push higher and a sharp reversal followed that ended just a couple of points above support. From support the market rallied again to keep the long-term uptrend intact.

The 5 &10 year T-Notes saw similar midweek weakness followed by strength on Friday to complete morning star bullish reversal patterns. Both of these markets have been weaker than the long bond, but the trend is still up across the sector.

Good trading

Phil Seaton

LS Trader

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