LS Trader Weekly Update

The past week saw the stock markets rally sharply from support during a light volume holiday week in the US. It will be interesting to see the market’s reaction this week as traders return to action and volume is likely to pick up substantially.

Stocks

The S&P 500 rallied from psychological support from the 1000 level and gained 5.74% for the week in what must be considered a bear market rally. Our indicators show that the long term trend is down and we are in bear market territory with the market forming lower highs and lower lows. The odds favour lower prices longer term and last week’s rally was likely overdone, although it may yet continue in the short term. If we get a continuation higher we can look to strong resistance at the prior highs around 1130. Otherwise look for another test of the 1000 level, which if broken may lead to a steep decline.

Volatility Index (VIX)

The VIX was sharply lower for the week as stocks rallied. The VIX fell back below what many consider the critical 30 level and ended the week lower by 17.07%, closing at 24.98. The VIX may sharply reverse this move if stocks start moving south again. Volatility is still relatively cheap at these levels.

Commodities

August Gold continued with short term weakness early in the week before posting a new 5 week low on Wednesday at $1185. From there the market moved back above $1200 before ending the week at $1209.8. The market formed a bull harami pattern on the weekly chart and looks set to test resistance at $1215 and if that level is cleared then we may see further strength. The long term trend is still up.

Crude oil had a strong week and rose in line with stocks. The September contract advanced 5.55% before closing at $76.63, roughly in the middle of the recent trading range between $69.50 and $80. Those 2 levels remain the levels to watch for now and we’ll be staying out of this market during this sideways action.

Currencies

The Dollar index had a fifth straight down week but looks to be finding some support around the 8400 level. We had written previously that we were looking for a move lower to 8340 but so far the selling ran out of steam at 8385. The action of the past few days has been within a fairly tight range so we may be building up for a larger move soon. Long term the trend remains up.

We wrote last week that the short term trend was showing bullish signs and that we were looking for a move higher to $1.27 but that the long term trend was still down. The market did reach $1.27 resistance with a high for the week at $1.2725 before closing right on the resistance level. The daily bar formed on Friday was a dark cloud cover, which is bearish, so as this has formed at a resistance level and the long term trend is down we may see some weakness. The more important weekly chart shows indecision also at the current level.

We have similar action and patterns on the British Pound, confirming resistance at $1.52, but the market has still been able to close above the $1.50 level. For now this market is continuing sideways and the long term trend is down.

Interest rate futures

Interest rate futures were lower for the week, moving inversely to the stock indexes. The long term trend is still up in this sector and the pause in the uptrend that we wrote about last week has led to short term weakness. The markets however still remain above what would be considered quite strong support so the rally may yet resume.

Kind Regards

Robert Stewart