LS Trader Weekly Update – Monday 16th January 2012

We wrote last week that the way the year has started with both stocks and the dollar rising is unusual and this has continued this week. The dollar index has risen to its highest level in a year and the S&P 500 has also reached a multi-month high. Stocks and the dollar are historically inversely correlated so how much longer both markets continue to rise together for remains to be seen. Probably not very long will be the answer.

Stocks

Over the past couple of weeks we have been writing about the so called January Early Warning system which states that if the first 5 trading days of the year end up, so does the rest of the year with good accuracy. The last 38 up first five days where followed by up years in 33 of those years for an 86.6% accuracy ratio. This year the first 5 days were up, so if you put any stock in this indi cator, then the year should end up. I personally have little faith in such an indicator and believe stocks will end the year lower but we shall see.

On a more important note than seasonal indicators, the S&P 500 finally took out the 1280 resistance level but has not as yet pushed on in a convincing manner. 1300 was tested on Thursday with an intra-day high of 1297.5 but resistance held and the market pushed lower. Short-term direction is still unclear but a break above 1300 would open the way for a rise to the 2011 highs at 1355.

Commodities

Crude continued its decline and moved back below the $100 level. We may now see a continuation lower towards the 200 day moving average, which may act as support. For now the trend remains up.

Gold reached a 4-week high on Thursday but was rejected above the $1650 level and a shooting star pattern formed, followed by a bearish engulfing pa ttern on Friday so there is clearly resistance at $1650. The long-term trend remains down and there is not much in the way of support between current prices and the recent lows.

Orange Juice was a hugely active market, which saw a limit up move on Tuesday take futures to a 34-year high but this move was reversed the next day. By the end of the week juice ended ahead by 3.85% in what was an extremely active and volatile week.

Biggest moving sector of the week was grains, which reversed much of their recent gains and markets often do when moves are made counter to the long-term trend. The long-term trend remains very much down across the sector and new lows may not be too far away.

Currencies

The dollar index continues to find support around the 8000 level which continues to hold well. Friday saw a decline towards 8000 but buyers came in well above support and took the index up to a new 12-month high. The trend remains up for the dollar index as it does for the dollar on the whole.

The Euro continues to drift lower, falling to new 15-month lows against both the Pound and the dollar. The trend is still therefore very much down. Against the dollar the euro remains in a bear channel that is quite well defined and has remained in place since the end of October. The top of this channel is currently around the $1.29 level so that should provide some resistance. If last week’s lows can be taken out then the next target will be $1.25 and below that we will be looking at $1.20.

Interest rate futures

We wrote last week that we may yet see new low yields in the interest rate futures sector and that has been seen this week. The uptrend has been stubborn to say the least in spite of most commentators expecting prices to decline and we have once again seen new high prices. Those who continue to fight the trend and try to call a top continue to do so at their own peril. With the likelihood of further easing from some of the central banks (something must surely be in the pipeline in the Euro zone and in the U.S.), I would not bet against even lower yields and yet higher prices. The trend is up.

Kind Regards

Robert Stewart

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