LS Trader Weekly Update – Monday 14th May 2012

Stocks have continued the seasonal May weakness and only the Dax has managed a small gain from the stock indexes that we trade at LS Trader this past week. All the indexes are now some way below their 50-day moving averages but the long-term trend is still up.

The dollar continued recent strength and advanced across the board taking out some key levels in the process. The dollar index now looks poised for a breakout higher and this may lead to continued weakness for commodities and further pressure stocks. The long-term trends are now mainly down for the commodities markets with only few exceptions but still remain up for stocks.

Stocks

The S&P 500 broke out of the box range with a break of support at 1350. This pattern would point to a move lower towards 1290 but first key support at 1340 needs to be taken out. 1340 is significant as it was a prior resistance level from the highs of 2011, formed almost a year ago. This resistance level is clearly visible on the weekly chart, and due to change of polarity, prior resistance becomes support. It is interesting to note that this level was respected this week with the low of the week being at 1339.5 before closing higher at 1350. For now though the long-term trend is still up.

The Dax has been the most bullish index of the week, being the only index to manage a gain. Following a sharply lower open on Monday, strong buying ensued during the day, forming a meeting lines pattern. The Dax was able to hold support from the lows of the week and end ahead by 0.30%. This suggests good support at last week’s lows around 6370. As with the S&P 500, the Dax has a change of polarity from last year’s highs at 6471, so the attempt to move below that level was rejected.

The Nasdaq 100 did move below 2625 but held up just above the 2575 lev el that we wrote about last week. The trend remains up.

The German Dax did push above 6800 on an intra day basis but was unable to close above that level and subsequently moved lower once again and now looks to be headed for a test of the lows of the current trading around 6500. Just below this is a further support level created by the change of polarity from the October highs, so a key support zone is in play for the week ahead. For now the trend is still up but the market’s reaction at this support zone will provide a clue as to near term direction.

Commodities

Last week we wrote on Gold “A test of the April lows at $1613 looks likely and if that support level fails then a move to the year’s lows at $1528.6 would become the target.” Gold sailed through $1613 support and ended the week down by 3.72% for the week before closing out at $1584. The year’s lows as $1528.6 may now be the next destination is there is not much in the way of support between here and the current price.

Crude did test and move below the 200-day moving average and also got a bounce higher before moving lower once again. This bounce was not all that surprising considering the extent of the decline in such a short period but the trend is now down and if last week’s lows can be taken out the next target will be circa $93.50.

Overall commodities are heading lower at present.

Currencies

We wrote last week that a few key support and resistance areas would likely be tested in the week ahead and that is what happened. As we have been writing of late, no support level was more important than the $1.30 level on the Euro and that gave way. That also meant that the Euro had made a downside break from a descending triangle so we can take the height of that triangle and subtract from $1.30 to give a targ et of around $1.26, or more accurately $1.2640, which are the lows of the year.

The dollar was higher across the board and this has led to the dollar index moving right to the top of the recent range with a breakout likely in the week ahead. Such a move would likely lead to continuing gains for the dollar against the major currencies and would put stocks and commodities under further pressure.

The commodity based currencies continue to be hit as a move back towards the risk-off trade has been evident, hence the move out of the riskier currencies and into the U.S dollar.

Interest rate futures

Interest rate futures were higher for the week with the exception of the 3-month Eurodollar. The 5 & 10 year T notes both reached record highs and the laggard of the longer-term markets, the 30-year T Bond also pressed higher. There are signs however of waning momentum and higher prices ar e being rejected intra-day as seen by the long upper shadows. The trend remains up but the upside may be limited, especially for the 30 year Bond.

Good Trading

Phil Seaton

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