LS Trader Weekly Update 30th December 2012

We’d like to wish all LS Trader readers and subscribers a Very Happy and Prosperous New Year!

Last week we wrote about the Santa Claus rally, which historically 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. Unless something dramatic happens over the next 3 trading days, the Santa Rally will have failed to materialize. Based on historic data this points to a bear market for stocks in 2013 or at the very least, stock indices fall to much lower prices at some stage during the year ahead. This year, the focus has been much more on the fiscal cliff, and at the time of writing, the inability for Washington to reach an agreement to avert the crisis. Such an agreement may yet be reached, but how much impact that has on the stock markets remains to be seen.

With just one shortened trading day of the year left, the long term trend is still up for stocks, with the exception being the Nasdaq 100. The trend is still down for the dollar, with the exception still being the Yen, and is still mixed for commodities.

The aforementioned long term trends will likely change at some stage in 2013, with long-term chart structures pointing to weakness for stock indices and commodities, and a probable dollar rally. The question is, when will these changes occur? The answer is that we have to wait for the markets to show us where they want to go and simply follow the developing trends. Those that try to jump the gun and make predictions on where the markets are going and when they will turn, are often thwarted by the markets.

Stocks

The S&P 500 traded lower on each of the 4 trading days of the past week as volatility continues to pick up. The huge spike down on the 21st, which was subsequently largely retraced during the same day, was exceeded this week with a flurry of late selling on Friday. Such a move, as already mentioned has all but certainly put paid to any hopes for a Santa rally and although the long-term trend is still up, a change of trend to down is within range should there be further selling during the week ahead.

The Nasdaq 100, which has been the weakest of the stock indices we trade at LS Trader, ended the week lower by 2.8% and may now continue lower to the next support level around 2515 on the March contract.

The Nikkei 225 was the only index to rise this week, as the Japanese index rallied for a seventh straight week, advancing by a further 2.57%. Does this mean the rally is over? No. Sometimes markets can rally for an extended period and much longer than 7 weeks. That said, the Nikkei could be pulled back if weakness in other global indices extends, but the next target, assuming the trend remains intact will be 10800.

Commodities

The grains sector has remained under pressure this year as the unwinding of the bull market seen earlier this year continues. The long term trend is down across the sector and we may see an extended down move for grains in 2013.

The metals markets have remained mixed, with gold and silver essentially moving sideways. The long term trend for both remains up but that may change next year. Palladium remains the strongest of the sector.

The energy sector was higher, with advances seen in all markets with the exception of Natural Gas, which ended the week flat. The trend remains up for the sector with the exception of U.S. Crude.

Currencies

The dollar has been mixed this past week but the majority of moves have marginally favoured the dollar. The dollar index has printed a spinning top on the weekly charts, which is indicative of uncertainty in the currency markets.

Once again the big move has come from the dollar/yen, which advanced 2.21% this week, for a seventh week of gains. The trend remains bullish with support just north of 8300 on the March contract.

Interest rate futures

The hammer type patterns printed on the weekly charts of the interest rate futures markets that we wrote about during last week’s updates were the bottom, at least for the near term as the sector moved higher this week. There still appears to be limited upside but for now the long-term trend remains up across the sector.

Good trading

Phil Seaton

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