Weekly Update 27th May 2013 – LS Trader

The past week has seen stocks hit new all time highs but then sell-off quite steeply in a move that may well be the market top for the time being. Whether this was actually the top, and a major top at that remains to be seen. Unusually, the dollar also corrected at the same time as stocks, so the unusual short-term price correlation between stocks and the dollar continues. We expect that their historical inverse correlation will resume soon.

Stocks

Last week we wrote that although stocks were still clearly in an uptrend that we were likely much nearer to the end of that uptrend than the beginning. Price action this week has seen stocks reach new all time highs again, but then sell off. As yet this has not terminated the uptrend, which may well yet resume. However, we may look back in time and see that this week was in fact a major top. Time will tell.

We also mentioned last week that sentiment in the Nasdaq 100 had reached 93% bulls, a level not seen in over 6 years and before the 2008 crash. Typically, such extremes in sentiment come near market tops, but the markets can continue to rally from those levels. This was seen this past week with bullish action taking the index up to a new multi-year high at 3052 before shedding 90 points in 2 days. As with all the stock indices that we trade at LS Trader, the long-term trend is up but the markets are under pressure in the near term.

Last week we wrote that there was little in the way from a technical standpoint to prevent the Nikkei from reaching 16000. The market rallied early in the week and exceeded 16,000, hitting 16,050 before embarking on a very steep 2 day sell-off that has brought the trend to an end for the time being. The long term trend remains intact but we may now see further price declines to 13,695.

Commodities

As we have been writing in recent weeks, we were still looking for the recent crash lows in both gold and silver to be tested again and we did see that in silver, but not in gold. Both metals subsequently bounced from their respective lows for the week. Although the trends are clearly down for both markets, the probability of a bounce increases as time goes on.

The very long-term chart structure and extent of recent selling on lumber suggests that this year’s highs at 409 posted back on the 11th March may be a multi-year top. Lumber has sold-off for 8 consecutive weeks, so a bounce can be expected near term, but longer term the trend is firmly down. Any selling is therefore likely to be corrective in nature and relatively short lived. Over the coming months we may see lumber continue to work lower towards the 2011 low around 257.

Currencies

The dollar has corrected against most of the majors over the past week, but the longer term dollar uptrend remains intact. The upside target for the dollar index remains in place at 8481 for the June contract, but the index may fall further near term before the longer term advance continues.

From last week on USD/JPY: “A correction is looking due here based on waning momentum but price action has yet to confirm or suggest any weakness so we can continue to look higher until there is price action to the contrary.” The dollar did push to new highs for the current move on Wednesday but then started to decline. The trend for now looks as though it is under extreme pressure and may terminate in the coming days. A move below parity would suggest further declines towards 9700.

Interest rate futures

Interest rate futures have been lower across the board over the past week, and although the long-term trend is still up, that may now be the case for much longer. A test of key support looks likely in the coming weeks, leading to a change of trend to down if the test is successful.

This week sees the June contract expire and roll forward to September.

Good trading

Phil Seaton

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