LS Trader Weekly Update – Monday 21st May 2012

Stocks have continued their recent decline and this week has seen some sharp moves lower. The long-term trend for stocks is still up but that may not continue for much longer if this weakness persists. Stock weakness has as ever been met with demand for the dollar, which continues to rise. Commodities overall have continued to suffer although there have been some exceptions, the trends are mostly down for commodities.

Stocks

Last week we wrote: “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 support gave way on Monday and there was no looking back as the S&P fell to 1289.9 just as we said it might. Due to change of polarity, 1340 should now act as resistance and may help to pressure t he market lower should any rally attempts reach that high and fail. The trend still remains up for the S&P 500 in the long term but that may change. The 200-day moving average at 1265 remains a very viable downside target.

Of all the indexes that we trade at LS Trader, only the Nikkei is below the 200 day moving average. The Dax has tested it this week and has so far bounced off it, but it remains a target for both the Nasdaq 100 and the S&P 500. If all the indexes move below the 200 MA we may see considerably more selling.

One thing to note is that the VIX is on the rise having made an upside breakout this week and has reached its highest level this year. This is an indication the fear is returning to the stock markets and that people are paying larger premiums to protect their stock portfolios from downside risk. The 30 level has been quite an important level for the VIX over the past couple of years and that may be where we are heading next. If the V IX does reach 30, stocks will be lower.

Commodities

For the past few weeks we have been writing about our downside target of $1528.6 for June Gold. This level was reached this week and it has been met with buying. A fairly decent rally has followed from there but how much further the rally can continue for remains to be seen. The long-term trend is still down and the market continues to form lower highs and lower lows. Clearly last week’s lows are now key support as they match up with the late December lows and will be needed to be taken out for the downtrend to continue. If support here can be cleared the next downside target would be $1494.

Crude was sharply lower this past week, ending with a weekly decline of 4.86% and easily falling through our target of $93.50. The next target will be $90 and subsequently $85 if $90 fails to hold. The trend is down for Crude as it is also for Heati ng Oil. Only No leaded gas is still in a long-term uptrend but that may also change in the not too distant future.

Currencies

We wrote last week “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 target of around $1.26, or more accurately $1.2640, which are the lows of the year.” The Euro fell to within 4 ticks of this target at 12644 and as expected support has so far come in. This led to the formation of a bullish engulfing pattern on Friday, confirming support from the prior lows back in January. However, the trend is still very much down and should the Euro rally from here it is likely to meet very stiff resistance at the prior support zone between $1.2975 and $1.3000.

The commodity based currencies continue to take a heavy hit and even the Canadian dollar, the strongest of the 3 commodity based currencies ended lower by 2.11% for the week. This brings a long-term change of trend to up for USD/CAD into range. This past week saw the Aussie dollar give a confirmed change of trend to down and the 9600 level will be the next downside target.

Interest rate futures

The trend for interest rate futures continues to be up but there are signs once again that the markets may be reluctant to push much higher from here. The 5-year T-note formed a dark cloud cover and was subsequently followed by a couple of doji, so indecision is certainly present at current levels. A close below the prior resistance levels, which should now be providing support due to change of polarity, would be short-term bearish and may lead to a correction. The 10-year T-note is holding up better than the 5-year, and the 30-year T-bond also had a strong week but both have a hanging man pattern formation on Friday’s daily chart . This is potentially a short-term bearish reversal, which would be confirmed by a close below the low of the hanging man patterns.

Good Trading

Phil Seaton

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