LS Trader Weekly Update – Monday 9th January 2012

As we kicked off the new trading year we saw a bullish week for the dollar with moves very much in the direction of the long-term trend and also a continuation of short-term strength in stocks. This is an unusual move as stocks and the dollar are historically inversely correlated. The long-term trend for stocks remain down but if short-term strength continues that may change soon. The trend for commodities is also down but commodities during the first week of the year have been mixed.

Stocks

We wrote last week about the focus for stocks being on what is known as the January Barometer and initially on will be on the first 5 trading days, which act as quite an accurate early warning system for what is likely to happen for stocks in the year ahead. The last 38 up first five days where followed by up years in 33 of those years for an 86.6% accuracy ratio.

The January Barometer is based on the full performance for January, which shows an 88.5% accuracy rating and has only been significantly wrong 7 times in the past 61 years. This barometer basically reads that as goes January, so goes the rest of the year, so if January ends ahead it is likely that stocks will end the year ahead according to this indicator. My view remains that stocks will end the year lower but time will tell.

We also wrote last week that what was more important were the resistance levels that the S&P 500 was testing and the market’s reaction at those levels would be key for the short term. We noted that there was an evening start pattern formed on the S&P 500 daily charts (a bearish reversal pattern) at the 1280 resistance level and both of these would need to be cleared for a move higher to occur. So fat, although the S&P 500 was higher it has been unable to break that resistance and the trend therefore re mains down. Of interest is the small-bodied candles and dojis once again at resistance which represent indecision at these levels. Although small bodied candles and dojis are not reversal patterns in and of themselves they normally indicate that the short-term trend has switched from up to neutral and often proceed a reversal. Therefore the week ahead may be critical. It will also give us the data for the first five trading days early warning system following Monday’s close.

Commodities

Commodities have been mixed for the past week and gains have been seen in metals and energies, whilst recent strength in grains has stalled and reversed somewhat. The long-term trends for commodities, which are mostly down but with a few exceptions, namely the energy sector on the whole, remains down.

Currencies

The dollar index on ce again held on to the 8000 level and that formed a platform for another advance and was sufficient to take out the recent highs. The 8000 level should continue to act as support and as long as it holds the short term trend will remain up. Last week’s high represents the highest level seen for the dollar index in almost a year.

We also wrote last week about the Euro and the fact that the Euro remains in a bear market set up as it continues to form lower highs and lower lows, and that continued this week with new lows seen once again. Last week’s low for the Euro was the lowest since September 2010 and the trend remains very much down.

Interest rate futures

The trend remains up for Interest rate futures as indeed it has for much of the past year and we may yet see yields fall to new record lows and new highs for prices in the not too distant future. Much will depend on how stocks react i f and when they test key resistance levels. A breakout for stocks to the upside will likely see a move lower for interest rate futures but if stocks move lower then new highs for interest rate futures remain on the cards.

Kind Regards

Robert Stewart

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