LS Trader Weekly Update – Monday 19th December 2011

Dear Alin,

As the year moves into the last 2 trading weeks, the long-term trends continue as they have for much of the year, down for stocks and commodities, and up for the dollar and interest rate futures.

Last Friday was triple witching, which saw stock index futures and forex futures roll out of December into June.

Stocks

Seems like everyone is talking about bullish seasonality for stock indexes at the moment as they pretty much have been since the beginning of December. However seasonality is not a reliable indicator and so far December is negative. That said, the true Santa Claus rally is actually much shorter than most people think and usually runs from the 23rd of December through to the second trading day in January so there is still time, although the 1260 area does provide some fairly decent resistance so even if it does rally the move may have limited upside. Of perhaps more interest is the fact that when the Santa rally fails to materialise, the following year is usually a bear market. I very much expect next year to be a bear market so we’ll see if the failed Santa rally (if it fails to happen) concurs with that.

Commodities

We wrote last week about gold “Gold continues to trade within a large triangle formation that goes back as far as September. The price action within the triangle is compressing which generally means that the market is beginning to coil up in preparation for a decent sized move once it makes the eventual breakout.” Gold did make a breakout to the downside and a very large move followed. February gold ended lower by 6.93% but it was considerably worse than that on Thursday, having been as low as $1562.5. The long-term trend does remain up for gold, the only metal that this holds true for, but possibly not for long.

We also wrote last week on Crude “Friday saw Crude find support from the 200 day moving average and recover some of the week’s losses but this support needs to hold or we may see a move lower to at least $95 in short order.” The 200 day moving average gave way on Wednesday and we did see a swift move down to $95 and all the way to $92.52 before a minor recovery. The long-term trend is still up but there is clear weakness in the short term.

Currencies

The dollar continues to move higher with gains seen this past week across the board. The dollar index also took out the resistance level around 8000 that we have been writing about for a while and reached a new high since January in the process. The dollar is approaching 52 week highs against several major currencies and although there will undoubtedly be corrections along the way, the trend looks as though it may stay up for the dollar for the foreseeable future.

Interest rate futures

Many traders continue to make the amateur error of trying to pick tops in the interest rate futures markets. There are many hedge fund and money managers that have been trying to short this market for most of the year, which in spite of whatever their expectations may be is a stupid move. It’s extremely dangerous to short a bull market and interest rate futures have been in a bull market for most of this past year.

While I would agree that there may be limited upside and the risk/reward for long trades may not be there, I would not be shorting this sector until there is confirmation of a change of trend and that has not arrived yet. Not only that but short-term support still continues to hold so anyone who shorts is taking a pure punt. The only exception to this is the short term 3 month Eurodollar, which is in a lo ng-term downtrend.

Kind Regards

Robert Stewart

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