Weekly Update 9 November 2014 – LS Trader

The past week has seen new all time highs for U.S. stocks, new multi-year highs for the dollar index as well as for the dollar against several majors, new multi-year lows for gold and silver and the Euro. Some of these moves may be reaching extreme levels in the short-term and some corrections could be due. However, the longer-term trends in all instances still likely have longer to run.

Stocks

The S&P 500 made a new all time high of 2033.5 on Friday basis the December e-mini contract before closing a few points lower at 2026. Quite incredibly this rally has gone 201.5 points since the 15th October low. That’s a touch over 12% in just 3 ½ weeks. To say that a correction is due would be putting it mildly and it’s not surprising to see a decline in momentum, signified by an indecision pattern on Friday’s candle and a lower RSI. However, the trend is still very much up and with a market at all time highs it would take a brave man to call a top. Also to consider is that on a historical seasonal basis, we’re now in the best 6 months of the year for the S&P 500 and it won’t be all that long before talk of the Santa Clause rally will be heard, a phenomenon that seems to arrive earlier each year. Time will of course tell, but it’s possible also if selling gets underway that this market could unravel pretty quickly.

The Nasdaq 100 had similar price action to the S&P 500 on Friday, closing lower having posted a new multi-year high earlier in the day. The Nasdaq overall though has spent the week going sideways, holding just above support formed from prior highs. In both the Nasdaq 100 and the S&P 500, if these trends are good, prior resistance formed at the September highs should now become support.

The momentum that began for the Nikkei during the prior week continued on Monday with a move higher to 17480, a level not seen since October 2007. Here we saw the RSI reach 77 on Tuesday, which for now marks the top. That RSI reading has not been seen since May 2013, which interestingly enough marked the May 22nd high before a 3775 point fall to the June 6th low! An equivalent decline would see a move back to the major shelf of support around 13865.

Commodities

Gold and silver both dropped to new multi-year lows on Friday, having declined throughout the week. A strong reversal was then seen, which in candlestick parlance was a morning star pattern, which typically suggests a short-term reversal. However, the strength of the downtrend suggests that these moves will ultimately prove to be corrective in a larger downtrend and we may not yet have seen the lows in either of the precious metals markets. How much further these corrections last for remains to be seen. On Thursday the RSI on gold had fallen to 20, a level not seen since April 2013.

Currencies

From last week: “…in the coming days the dollar looks set to test key levels and possibly breakout against a few more of the major currencies.” This call turned out to be right on the money as the dollar broke out against all the remaining majors, which included a break to new highs for the dollar index to levels not seen since June 2010. There is however considerable bear divergence on the RSI between Friday’s high and the RSI high from early October. This does not mean that a reversal is imminent merely that momentum is waning.

From an inverted perspective, it’s the same story for the Euro, which on Friday made its lowest print since August 2012. Here, bull divergence is evident on the RSI.

The Yen also weakened as the dollar rallied to levels not seen since October 2007. It’s noticeable that the Yen, which is highly inversely correlated to the Nikkei, was weaker but the Nikkei also dropped. This suggests that one of these moves is out of sync in the near term.

Overall the dollar bull market is well underway, and from a multi-year perspective still likely in its early stages. Corrections will be seen along the way for sure.

Interest rate futures

The long-term trends are still up for the entire interest rate futures sector both in terms of price and RSI. The RSI has drifted to the lower end of the bull range but remains above 40, which is typically where bull market support is found. Friday’s price action was bullish with the daily candle engulfing several prior days’ real bodies. This suggests we may see short-term strength in the sector, possibly for 5-7 days at least, but there’s a long way to go yet to reach last month’s highs.

Good trading

Phil Seaton

LS Trader

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