LS Trader Weekly Update

The past week saw the recent stock market rally run out of steam and reverse sharply on Friday, which may be a sign of things to come. We have also seen continued weakness in the US dollar, so the inverse correlation between stocks and the dollar continues to abate. The relationship between stocks, commodities and the dollar has been very high of late, meaning that most markets have been moving together with a higher degree of correlation than is the historical norm and if this relationship continues to subside, trading conditions will become a lot more favourable.

Stocks

The S&P 500 ran out of steam at 1100, which is also where the 200 day moving average is sitting. The combination of resistance from both of these areas appeared too much for the market and this led to a heavy sell off on Friday and what may prove to be a continuation of the long term downtrend. The counter trend rally that we had previously seen still looks like it was a bear market rally and odds favour lower prices from here especially if 1100 resistance holds.

We continue to see lower highs and lower lows in this market and this suggests a new low coming in this market in the not too distant future. The other stock markets will likely take follow.

Volatility Index (VIX)

The VIX ended the week higher by 5.08% having moved steadily higher for 4 straight days. The VIX had been higher on Friday, reaching a high for the week at 28.16 before closing at 26.25. This is still a relatively low level for the VIX and weakness in stocks will see the VIX move higher.

Commodities

August Gold continued to struggle, in spite of weakness for the US Dollar. The $1220 level has so far proved too much for Gold and we have seen a couple of tests of $1185 support during the past couple of weeks and will see this level tested again this week. Failure here will open the door to $1170 and possibly lower levels than that. Long term the trend is still up but a move back above $1220 will be needed soon or further selling is likely.

Crude Oil continues within the recent sideways trading range that has formed between around $71.50 and $81 (September contract). We view it as best to stay out of this market whilst it stays within this trading range and let the bulls and bears fight it out for future direction. A beak of either one of the 2 aforementioned levels may give rise to a move and at present that break favours being a downside break, in the direction of the prevailing long term trend.

Currencies

A sixth straight week of declines for the Dollar index took out support at 8340 that we have been writing about for the past few weeks. Failure to hold that support level gives anew downside target of 8050, but long term the trend is still up. At present we have no reversal signals in this market to suggest that the selling is over so we may see a continuation lower yet before some support is found. Much will depend on what happens with the Euro.

The Euro itself had a strong week, gaining 2.35% in what is still a counter trend move. This move briefly tested the $1.30 level but stalled at $1.3006. The short term trend remains up but long term trend is still down.

The British Pound continued to advance but may have run out of steam at major resistance around the $1.55 level. Friday’s dark cloud cover pattern tends to confirm that key resistance level so we may see some weakness form here and the long term trend remains down. If however the market can get back up above $1.55, a level not seen since February then we may have a change of long term trend to up and the potential for a larger move higher.

Interest rate futures

Interest rate futures had a very good week with the 5 & 10 year notes both making new 52 week highs and the 30 year T Bond not far from doing so. Having drifted lower for much of the previous 2 weeks we had a bullish engulfing pattern form on Tuesday and Wednesday confirming short term support and the markets have been strong since. The long term trend remains up in this sector and these markets continue to look bullish and that will remain the case until support is taken out.

Kind Regards

Robert Stewart