Stocks have continued to decline since the failure of the market to break to new all time highs. It is quite possible as we explain below for various reasons that this could be a key stock market top for some considerable time, with plenty of downside potential. However, for now the long-term trend is up for each of the 4 stock indices we trade at LS Trader and that will remain the case until we get confirming price action to the contrary. Based on price action alone the sell-off seen in the past 2 weeks is merely a correction.
On the basis of the January Stock Market Barometer, a bear market lies ahead for 2014. As far as seasonal indicators are concerned, this is one of the more valid ones. It has only been wrong in a significant way in only 7 years since 1950. In essence this indicator states that as goes January, so goes the year, so a down January usually leads to lower prices later in the year and often precedes a bear market. The January Barometer has an 88.9% accuracy ratio, and based solely on this indicator and the poor stock market performance in January there could be considerable downside ahead. However, in addition to seasonals a few technicals are also pointing to lower stocks.
Although it’s not a market that we trade at LS Trader, the FTSE 100 could have put in a triple top at weekly chart level with the all time high posted back on December 30 1999. A sharp 50% decline followed until the market recovered to almost reach the highs in 2007. From there we saw another near 50% decline, which has only recently been fully retraced and ultimately exceeded. That rally too, which ended in 2013, also failed to reach new all time highs. In contrast, the Dow 30, S&P 500 and Dax all reached new all time highs in 2013 and the Nasdaq posted a 13-year high. The FTSE then was the weakest of all of these. The reason for writing about this this week is the fact that historically the FTSE has been the first to break lower several times over the years, so the triple top in the FTSE could also be warning of a coming global sell-off as it has been unable to exceed the May 31 2013 high whereas the other indices did.
The have been a handful of decent moves this week in the commodity markets. Natural gas has been highly volatile once more, with some large daily moves being seen in both directions. The result of this was the market ending virtually flat for the week and printing a doji at weekly chart level. A doji is an indecision pattern. So, whilst the long-term trend is unquestionably up, short-term price action is less clear.
Coffee has also made a breakout to the upside, giving a confirmed change of trend and may yet head higher towards 140. London cocoa also made a decent move to the upside, reaching its highest level since September 2011.
Gold and silver have been relatively quiet, but copper, known as Dr Copper for its predictive abilities was sharply lower and may complete a change of trend to down in the coming days. Such a move would be bearish for stocks. Palladium was also weaker.
Last week we wrote that the dollar had not reacted to stock market weakness in the way one would expect due to the historical inverse relationship between stocks and the dollar. This week has seen a return to a more normal state of affairs with the dollar rising as stocks fell. The dollar index has been strong, rallying over 100 points from last week’s low and printing a bullish engulfing pattern on the weekly chart. The long-term trend is still down but that could change soon, especially if we see a continued move towards risk-off.
Interest rate futures
The long bond looks poised for a change of long-term trend to up over the next week or so with a critical resistance level looking likely to be tested. Should this resistance level be taken out there is a decent amount of clear headway for a rally, with the next technical resistance level considerably higher at 139.56. This level will be the target should the market breakout soon.
The long-term trend appears to be shifting to up in this sector with the trend being up for Euribor, 3 month Eurodollar and 5 year T notes already. The 10-year T note and long bond could join the uptrend soon.