LS Trader Weekly Update – Monday 1st August 2011

All the focus will be on the US debt debate relating to raising the US debt ceiling in order for the US to avoid default and lose their AAA credit rating. It is in reality a joke that the US still holds this status as their debt levels are already beyond the point of no return and the fact that the US still holds the triple A rating shows how much of a joke the rating agencies are.

Stocks and the dollar have continued to edge lower whilst commodities remain mixed. Events from across the pond later today when the US senate votes and later this week will likely give a clearer perspective on future market direction. Some big moves may be on the cards.

Stocks

The S&P 500 reversed, having failed to clear 1354.5 and sold off sharply, taking out support at 1290 and bringing the current bullish run to an end. The current for mation on the S&P 500 is of a very large head and shoulders pattern. We may see move lower towards the neckline of the pattern and key support around 1250 on the September contract. If that level is reached and support taken out we may see a further decline all the way to the 1125 to 1150 area, approximately 140 to 165 points lower than Friday’s close. To the flipside of that argument, head and shoulders patterns have the habit of failing as so many people look at them so we may see a bounce higher from the neckline should the market decline that far. For now the long term trend remains up for US stock indexes.

Commodities

Crude once again failed to clear the $100 level on a closing basis and failure this time led to a move lower, culminating in a weekly loss of 4.18%. In the very short term the current range spans approximately $10, from $90 to $100. Both levels will be watched closely.

December gold added 1.71% for the week and reached new all time highs yet again, this time at $1637.5. Silver did not for once follow gold’s lead higher and ended the week roughly flat narrowly holding on to the $40 level.

Currencies

The dollar index fell just short of declining to our short term downside target at 7330 and recovered a bit but still ended the week down. The dollar has fallen to all time lows or multi year lows against several currencies this past week, underlining how bad the plight of the dollar actually is.

As we wrote last week, we still have the unusual position of high risk currencies like the New Zealand and Australian dollars being in strong demand at the same time as the Swiss Franc also hitting new all time highs. The Swiss franc is very much a safe haven currency. Another popular safe haven currency is the Japanese Yen, which has continued to climb of late and is now at levels last seen when the Bank of Japan intervened to prevent the Yen from appreciating further. Further intervention may follow this week from the BOJ.

Interest rate futures

In spite of the debt debate going on in the US, interest rate futures have continued to advance and yields continued to decline, so treasury markets certainly don’t think there will be any chance of default and price in an expected agreement to raise the debt ceiling higher, a situation that will likely happen today. As well as this, there has been further poor economic data coming out of the US, so the prospect of QE3 is very much on the table, which will likely benefit treasurys but spell further trouble for the US dollar.

Kind Regards

Robert Stewart

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