The past week saw the expected weakness in stocks and a continuation of the counter trend rally in the dollar against most of the majors. For now, the long-term trend remains up for stocks, although some short-term technical damage has been done. The long-term downtrend remains intact for the dollar in spite of the recent bounce.
From last week: “August has been the worst month of the year for the S&P 500 since 1988 and given the extent of the recent rally and lack of volume and volatility; a correction is well overdue.”
We saw a big move down in stocks on Thursday this week as short-term support was broken. This continues weakness in the stock indexes since the outside-downside day on the 27th July where the Nasdaq 100 printed new all-time highs. This is not good price action to be coupled with new all-time highs. Price action has been similar in both the S&P 500 and the Nasdaq, and the break of support brings the uptrend to an end for the short-term, but the long-term picture and trend remain bullish, for now.
The Dax has been weaker still and is the weakest of the four stock indexes we trade at LS Trader. Price this week fell to and found support at the 200-day moving average. The RSI fell back below the 40-level, which is bull market support, and the RSI is therefore now in the bear range. A close below last week’s low would be bearish and suggest a change of long-term trend to down was imminent.
Strength has been seen this week in the metals markets. Gold began the week lower but bounced right off its 200-day AM and rallied higher towards resistance around the $1300 level. Gold has broken the downward sloping trend line from the 2011 all-time high this week. A breakout above the April and June highs in Gold could be seen soon, and the bullish case is building. Silver remains weaker than Gold but also rallied. However, resistance has been found at the 200-day MA, and the trend for Silver is still down.
The stronger of the two metals markets, and the two that the LS Trader system currently has long positions in are Copper and Palladium. Copper rallied to its highest level since May 2015 but has run into resistance at the 295.50 level. Palladium reached its highest level since September 2014, but multi-year resistance at 913 continues to hold firm. If that level can be decisively broken, we could see further rally towards all-time highs (1090) later this year.
The energy markets continue to grapple with the 200-day MA as sideways trade continues and there is nothing doing in the energy markets at present.
The dollar gained against most of the majors but was lower against the Euro. The dollar index also ended the week lower having earlier tested resistance. We could see the Dollar Index test the recent low. It should be noted that this week’s close on the Dollar Index is the lowest weekly close since April. The 91.36 low printed in the first week of May basis the back-adjusted continuation charge is a major support zone which will likely be vigourosuly defended. If that level is broken, then we could see longer-term declines towards the 86 level.
Interest rate futures
Interest rate futures displayed some strength this week to close higher for the second consecutive week, but Friday’s indecision bar on the Long Bond keeps these markets range bound for now. However, the shorter-term markets are closing in on a test of resistance, and we could see a breakout in the 5 Year T-note as early as Monday. The long-term trend remains up across the sector.