Following the extreme volatility of the two previous weeks, the past week has seen a return towards more normal market conditions. However, volatility in stocks has still been much higher than the rest of the year to date, and there have also been some large moves in the energy markets.
The week ahead is a shortened trading week due to the Labor Day holiday in the U.S. on Monday. Tuesday onwards will see traders and money managers returning to their trading desks following the summer break. This typically leads to a large increase in trading volume and normally sees the volatility due to less liquidity decrease.
Stocks have been considerably less volatile this week than what was seen in the previous two weeks. The bear market rally that began at the low on August 24th may have ended this week on Monday’s high. Stocks have since turned lower.
As we mentioned may be the case in last week’s update, the lows that had acted as support for the stock markets did change to become resistance, as support once broken often becomes resistance. This level held on each of the stock indexes that we trade at LS Trader and remains the key resistance level. As long as these resistance levels hold we can continue to look for lower levels.
The long-term trends are down for stocks, and the RSI is in the bear range. This adds to the expectation of lower levels ahead. At a minimum, we should see a test of the August 24th lows in the coming weeks.
The Nikkei is currently the most volatile of the stock indexes at present with the past two weeks featuring near 2000 point daily ranges, and regular daily moves in excess of 1000 points. These are not normal conditions at all. However, the major support low that held the market up for months has since acted as resistance, almost exactly to the point. The outlook for the Nikkei remains bearish while that remains the case.
The Volatility Index Futures (VIX) rose above 30 for the first time since 2011.
The energy markets rallied sharply higher on Monday, bringing the downtrends to an end for now in Crude Oil, Brent Crude and Heating Oil. These were all profitable trades for the LS Trader system. However, the longer-term downtrend remains intact, so we view these corrections as bear market rallies and still expect these markets to fall to new lows. Time will tell of course.
The metals markets have been mixed. Silver had closed higher for six straight days before closing lower on Friday. However, the rally could best be described as a market rising in agony as the real bodies were all small, and each has a long higher shadow, which indicates higher prices levels are being rejected. The long-term trend remains down for silver as indeed it does for all the metals we trade.
Copper has been the strongest of these metals this week, rising above resistance, bringing another profitable short trade to an end. However, it looks like that was a corrective rally, and that new lows lie ahead.
Palladium has been in the biggest downtrend of all the metals in recent months, but the last two weeks have seen some strength. However, the market has held below resistance and the RSI has been unable to clear the 50 level and, therefore, remains very much in the bear range.
The dollar index edged higher this week as the dollar gained against most of the majors, particularly the commodity-based currencies of Australia and New Zealand, and to a lesser extent against the Canadian dollar. These moves have the dollar at or near its highest level against these currencies for over six years.
The British Pound has continued its steep decline against the dollar, having now closed lower for nine straight days. This weakness has returned Cable to the middle of the trading range that has been in place for 2015. The Euro has also been weak since the high printed on the 24th August and is also roughly in the middle of its recent trading range.
Interest rate futures
Interest rate futures ended the week higher, and the outlook for these markets remains mixed. As before, the long-term trend is still down in the 30 Year T-Bond and the Long Gilts but is up for both the 5 & 10 Year T-Notes and the 3 Month Eurodollar.