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Weekly Update 21 September 2014 – LS Trader

U.S stocks began the week with weakness, but this turned out to be just a short-term correction as the S&P 500 and Nasdaq 100 both broke out to new highs again on Friday, which in the case of the S&P 500 was an all time high.

The Federal Reserve meeting came and went, and dollar strength continued. The Scottish referendum resulted in the expected “No” vote and the Pound put in a relief rally before reversing on Friday in what looks like a case of “but the rumour, sell the fact”. The trend remains down for the pound and up for the dollar against all of the majors. Other long-term trends also remain unchanged and continue to favour stocks and interest rate futures, but remain against commodities.

Stocks

From last week on the S&P 500: “Long-term the trend is still very much up, but if the dollar continues to strengthen we may see further weakness in the S&P 500 and may see the RSI test the 40 level in the next week or so. Whether that level holds or gives way will be a good clue to near term price action.” The RSI did hold well above the 40 level, remaining in the bullish range and closing the week out at 64.46. This number in itself is bullish, but there is bear divergence between price and RSI. The long-term trend however is still clearly up, even if momentum is waning.

The Nikkei continues to trend nicely higher, benefiting as usual from a very weak Yen to reach its highest level this year, and within touching distance of the multi-year high posted on the 31st December 2013. A break above that high, at 16450, would have the Nikkei at its highest level since November 2007, prior to the crash.

Commodities

The CRB commodity index fell to new 4 years lows following the break of the key support level at 500 the week prior. This week’s continued weakness is confirmation of the break of support and any corrective rallies should now find resistance at the 500 level, leaving prices set to decline over the coming weeks towards the next key level of support at 450. This weakness in the CRB, combined with the fact that most of the long-term trends in the commodities markets are bearish, suggests still further weakness in these markets and likely continued long-term dollar strength.

Gold and silver both continued sharply lower following the break of key support during the prior week. Silver effectively collapsed through a critical level of support and is now at its lowest level in 4 ½ years.

Currencies

We discussed above the Scottish referendum and the short-term impact that it has had on the pound. We still look to new lows over the coming weeks in the pound, back below the recent low at 1.6039 as the long-term trend has not been impacted by the recent corrective rally and still remains down.

The dollar continues to rise and the long-term trend on the basis of LS Trader’s proprietary algorithm is up across the board. The dollar index came within 3 pips of major resistance at 84.96, which was the index’s highest level in over a year. The index has not traded above 85 since July 2010, so a break of that level would be bullish indeed and would possibly have major implications for stocks and commodities, neither of which would benefit from an even stronger dollar. The RSI on the dollar index is at a very bullish 79.91, but there is bear divergence between price and RSI.

The Japanese Yen has dropped to its lowest level since August 2008 in a move that is benefitting the Nikkei as discussed above. The RSI here has risen to 87.28 (USD/JPY forward), bullish levels that are rarely seen. It’s possible therefore that we may see a correction, but longer-term the dollar should continue to rise.

Interest rate futures

Interest rate futures were mixed this week. For now the long-term trend is up in all 5 interest rate markets that we trade at LS Trader, but as has been the case for a considerable time, the longer-term markets continue to hold up better than the shorter-term markets in the U.S.

Strongest market in the sector by far is the Euribor, but a top could be in. Further strength is unlikely due to the proximity of the market to par, a price level that is unlikely to be broken.

Good trading

Phil Seaton

LS Trader

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