LS Trader Weekly Update 23rd December 2012

LS Trader would like to wish all our readers a very Happy Christmas. We hope you all enjoy the festive break.

The week ahead is supposedly the week of the Santa Claus rally, which often brings a short and sweet rally to global stock indices during the last five trading days of the year and the first two trading days of the New Year. Will Santa call this year? That remains to be seen. What we can say is that in the years that the Santa rally has not occurred, bear markets usually follow the next year, or at the very least, stock indices fall to much lower prices during the year. It would seem that this year the focus is likely to be more on the rhetoric coming out of Washington than any seasonal patterns or tendencies.

As we enter the final trading week of the year, the long term trends are up for stocks (exception being the Nasdaq 100), down for the dollar (exception being against the Yen) and mixed for commodities.

Stocks

In what was an extremely volatile week, the S&P 500 managed to end higher by 1.19% but it had made a large round trip in order to get there. On Tuesday the index reached its highest level for the current move and was beginning to look like a test of the highs of the year was on the cards. We then saw some weakness and a recovery, until the fireworks on Friday! Friday saw the largest one day move on the S&P 500 in a long time as the market collapsed in precipitous fashion only to find support at 1391.7 and then launch a strong recovery.

The sell-off was apparently triggered by news that a deal to end the fiscal cliff was unlikely to be reached when the market was expecting a resolution, and that had already been priced in. The sell-off and recovery suggests this was just a knee jerk reaction and that an agreement will be reached before the deadline, but the extreme selling may be a preview of what may happen should an agreement not be reached by the deadline.

The S&P 500 was not the only market affected as selling also hit the Nasdaq 100 on Friday, and to a lesser extent, the Nikkei 225. The Nikkei had earlier in the week reached our longer term target at 10200. The Nikkei also staged a good recovery following the sell-off and the trend remains up.

The Dax was seemingly unaffected and eased through quarterly expiration, ending the week ahead by 0.69%, also reaching our target of the May 2011 highs at 7700.

Commodities

Commodities have been very mixed this past week with some sectors advancing and some selling off sharply. Gold and silver have both continued recent weakness and although the long-term trend is up for both markets, both have hit multi-month lows this past week. Copper and Palladium also fell as the metals sector took a hit for the week.

Another sector under pressure has been the grain markets, which have continued to unravel the bull market seen earlier this year. The current chart patterns suggest that there is a good possibility that much if not all of the recent bull run will be erased in 2013. This will present some highly profitable spread betting opportunities over the coming months.

Some strength has been seen in the energies markets, all of which ended the week higher. The trend is still up for most of these markets, with the exception of U.S. Light Crude.

Currencies

The dollar index fell almost exactly to our target at 7900, reaching a low of 7901 before putting in a decent recovery, forming a hammer pattern on the weekly charts. The trend is still mostly against the dollar and we may yet see some further weakness before a larger dollar rally is seen in 2013.

Once again the British Pound rally has halted at $1.63 for the third time this year and this level now represents very strong resistance. That said, should the market be able to test and break through that level, a rapid rally to $1.67 may follow.

Interest rate futures

Interest rate futures all ended the week lower, but each of the markets put in a recovery during the later part of the week. Hammer type patterns have been seen on the weekly charts in the longer term markets, indicating support at the lower levels. As has been the case for what seems like forever, the long-term trends are still up and considerable further weakness will be required before that changes.

Good trading

Phil Seaton

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