Stock indices have had another good week and once again new all time highs have been posted. Sentiment levels remain at exuberant levels, which often precedes a dramatic sell-off, but for now the bull market remains intact and prices continues to rise.
We have seen the dollar and stocks rise this week which is unusual as these two sectors are historically inversely correlated, meaning that for the vast majority of time they will move in opposite direction. This generally means that one of the two sectors is “lying” and that the normal inverse correlation will resume in short order.
As we have written in the past two weekly updates, we continue to favour the bullish scenario as long as key support on the S&P 500 holds and this remains the case at present. At the end of the day, even with sentiment levels pointing to a sharp correction, price action is king. As long as prices continue to rise it’s essential to continue to follow the trend until there is price action that gives evidence that the trend is over. Many bears have been run over by this advance by foolishly trying to pick a top and shorting the market. Based on COT data this includes a large amount of commercial funds that have continually tried to fade the trend in recent weeks. The LS Trader system has however continued to profit from the bull market in stock indices and will continue to follow the trends up as long as they remain intact, however long (or short!) that may be.
The Nikkei continues its bull run, this week advancing by another 4.26% and finishing the week higher for the sixth straight week. A test of the psychological 15,000 level looks to be on the cards soon, with the next chart resistance coming in at 15,180. The index currently sits at its highest level since June 2008.
The scenario for gold and silver remains the same as has been for the past two weeks. The trend is clearly down for both metals and tests of key near term resistance have failed, as resistance continues to hold. As long as this remains the case then tests of the recent crash lows remain on the cards with the prospect of lower prices. If resistance is broken then a further advance to test the underside of the shelf of support in each respective market may follow. In both cases, prior support should act as resistance so only a move above the major support lows that held for long periods of time for gold and silver would change the long term bear view.
From last week on the dollar index: “…last week’s low, which also correlated with a bounce from the 200 day moving average, may be the bottom for the time being and potentially the beginnings of a new uptrend which may test the April high at 8366 and further out a test of the 2012 high at 8481.” The index continued its advance, hitting a high for the week at 8352, just pips short of the April high. If 8366 is exceeded, the 2012 highs will be the next target around 8481.
The dollar did have sufficient momentum to finally break parity against the Yen as we indicated may happen. We now look to previously identified targets at 105.
Overall we are looking for the dollar to continue to rise over the coming weeks. This will likely pressure commodities further and may put a lid on further stock index advances. Interesting times are ahead with trading opportunities aplenty.
Interest rate futures
Last week we wrote: “The selling on Friday was so extreme that the price action engulfed prices for the prior 8 trading days. Such extreme selling is normally an indication of a reversal so we may see lower prices near term.” This week has seen a continuation of the selling that was initiated during the prior Friday. The longer term trend remains up for the sector but the extent of the recent selling suggests lower prices near term and a possible test of key support, which if broken would result in a change of trend to down.