Weekly Update 22 October 2017 – LS Trader

The past Thursday was the 30-year anniversary of the October 1987 stock market crash. The stock markets experienced a fairly sharp dip early in the day but recovered just as quickly before going on to make new all-time highs in the case of the S&P 500. Global stock markets remain bullish but also extended.

Stocks

There are many reports in the media from so-called experts that claim that the stock markets are ‘climbing a wall of worry’. The fact is that this simply is not the case as bullish sentiment is at a very high 89% and the VIX, known as the fear index, fell below ten this week. These combined indicate an almost complete lack of fear and the opposite of a wall of worry. It may be true to say that these markets are over-extended, as they clearly are, and could correct at any point, but climbing a wall of worry is false. They are, in fact, almost as bullish as they can get.

Using the Dow 30 as an example, the market is at approximately four standard deviations above fair value based on our proprietary indicators. This is the most extended this market has ever been. Our proprietary volatility/directional indicator has the market at an extreme not seen since the 2009 low. We also have, at 87.78, the 9th highest 14-day RSI reading in history. Such readings are extremely elevated on all the major timeframes, monthly, weekly and daily.

Does this mean that a top is in? No. Markets can remain overextended and ‘overbought’ for very long periods, often much longer than short-sellers can remain solvent. It does mean that conditions at all the major timeframes are ripe for a correction and when such a correction comes, the reversal is likely to be sharp. For now, the trend for global stock indexes remains bullish, and that remains so until the weight of the evidence shows that this has changed.

The S&P 500 leads the way and the bearish divergence that we commented on last week has been erased as we have had a new high in price accompanied by a new high in momentum. Bulls will be pressing for 2600 this week.

The Nasdaq 100 has lagged the S&P 500 this week but still made new all-time highs on Wednesday. The market remains above the top of the running wedge that we have discussed in recent weeks, which still points higher towards 6400.

The Nikkei also continues its strong run and may test the April 2000 high at 21,800 this week.

The Dax remains the weakest of the four indexes that we trade at LS Trader, but even then was able to print a new all-time high and cross 13,000 for the first time. The Dax is undergoing significant volatility compression which suggests that it will be the first index to break lower, particularly if it closes back below the resistance level from the June all-time highs which should now act as support.

Commodities

The commodities markets remain subdued on the whole and the best trending market of the past few weeks continues to be Lumber, which remains on target for our next target at 461 over the coming weeks in spite of a minor correction this week.

Currencies

The dollar has continued its recovery this week against most of the majors. There is the possibility of a head and shoulders bottom completing this week with a break above the neckline. Such a move would suggest that the dollar had bottomed and may continue to press higher towards a change of long-term trend to up over the coming weeks.

The dollar has already completed a change of trend against the New Zealand dollar and Swiss Franc and may also do so if key support gives way against the Japanese Yen. (Support for JPY/USD, resistance for USD/JPY).

Interest rate futures

Interest rate futures were unable to clear last week’s high and weakness resulted in the five-year T-Note breaching support and completing a change of trend to down. The 10 Year T-note and long bond could follow and also complete a change of trend to down this week. The potential head and shoulders top on the 30 Year T-Bond continues to form, and a break of the neckline could be seen in the coming weeks.

Good trading

Phil Seaton

LS Trader

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