Market Week in Review, August 23 – 27

Let’s put the wrap on an interesting week in the financial markets. The week brought us a large dose of economic data, most of it very disappointing, casting doubt on the strength of the economic recovery. In spite of this, the swooning stock markets found buying which came in at key support levels. Though the SPX actually lost ground on the week, there was positive price and volume action on both Wednesday and Friday.

Bonds have been on a tear, but they also reversed course just a bit at week’s end. Have a look at the weekly charts of these two widely owned Treasury ETFs, and note the “shooting star” candles. This is a classic reversal signal in candlestick charting, and combined with highly overbought conditions (look at the RSI), it suggests we may see a correction.

(click on charts to enlarge)

For those intrepid enough to trade this, the double inverse long bond ETF, ticker TBT, may provide a quick profit next week.

In currencies, the action in the US Dollar and euro was not very decisive, but the Yen did see a reversal of its rally on Friday, and the weekly chart shows a shooting star similar to Treasuries. These are all consistent with the risk aversion trade being taken off as the week ended.

We have been saying that buying oil around $70 has been a reliable trade over the past year, and this didn’t let us down – the price reached as low as $70.76 before bouncing and finished the week above the $75 level. Natural gas, on the other hand, sold off hard again and made a new low for the year. The action in gold lacked much direction, but silver moved up nicely.

Looking ahead, we have a month end coming up, with the expectation of the attendant window dressing, and we have a tentative reversal in the recent risk averse trading pattern. Stocks and oil look like they are set up for a bit of a pop, while bonds and yen look ready for a drop. For swing trades, that is how I would approach it. For longer term positions, major support has held in a number of sectors and indices, so the outlook for equities may not be as bearish as the news flow suggests.

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