by Scott Hoffman, Senior Broker & CTA
S&Ps had a relatively volatile week but ended up closing about where they started. As momentum reached a multi-month low, the sharp decline of the previous week set up a good buying opportunity last Monday. Then, the two day rally pushed the momentum indicator up to a short sell signal on Wednesday, leading to a sell-off. In addition, the narrow range day on Wednesday led to a big sell-off on Thursday, as Wednesday's low was violated. Finally, Friday's pre-holiday trade gave us a narrow range/inside day generating another breakout signal for Tuesday, July 5th, which led to a big upmove.
For the coming week, the high level of volatility may lead to consolidative trade early in the week. The ISM Services number is due on Wednesday, and June's payroll numbers will be released on Friday. Past that, we move into the 2nd Quarter earnings period in mid-July.
Treasuries had a tough time last week. Strong US economic readings and the prospect of continuing rate hikes by the Fed weighed on prices. Last Monday's high likely marked an intermediate term peak in bonds, as they put in a double top over 119-00. A volatile session on Wednesday (corresponding with the FOMC announcement) left a failed rally, but the low in the momentum indicator gave a buy day signal for Thursday. This lead to a decent rally; however, the market was unable to take out Tuesday's spike high. On Friday, the strong ISM number combined with thin conditions pushed bonds down to a 50% retracement of the last rally at 117-18. Yesterday's trade saw follow-through selling, and the gap lower opening created an island top (gap from 117-16 to 117-12).
For the coming week, as prices look to drive back toward the last low around 116-00, expect the downside pressure to continue early. Then, as traders position themselves for Friday's payroll numbers, we may see some recovery later in the week.
The Dollar Index was strong last week (certainly not a surprise if you watch CNBC!). The Dollar came into last week on a buy signal on momentum, which gave us a two-day rally on Tuesday and Wednesday. Thursday had a narrow range/inside day setup, which led to the rally to a new high on Friday.
For the coming week, I expect consolidation trade early in the week, as the market digests last week's gains and works off the extreme in momentum. Look for the rally to resume later in the week, as the uptrend reasserts itself. However, the payroll numbers on Friday could roil the financial markets. Therefore, traders should exercise caution at the end of the week.
Gold had a rough week last week, losing over $13 per ounce. Unable to garner any support from last week's rise in crude oil prices, Gold chose instead to focus on the strength of the dollar and the rise in US interest rates. Last week started with the narrow range/inside day breakout setup that led to a decisive break under $440 support. Tuesday and Wednesday saw a recovery rally and retest of that broken support at $440, but the inability to regain it helped lead to Friday's sharp sell-off, which was aided by a broad-based decline in commodity prices and a sharp rise in the US dollar.
For the coming week, look for the sell-off to continue, as the MACD gave a sell indication last Wednesday. The next objective is the May low around $415. The sharp decline (nearly $26 since June 28th) may lead to a recovery rally, but I would use such a rally as an opportunity to sell short.
Cotton continued its advance last week. Dec Cotton came into last week with momentum at an upper extreme, leading to a sharp sell-off on Monday. Momentum then gave a buy setup on Tuesday, which was extended on Wednesday as the last rally high around 55.50 was exceeded. Momentum gave a sell short signal on Thursday. Consequently, the market sold off on Friday, but the strength of the trend brought in buyers.
Tuesday saw an extension of the rally, and momentum is low enough that we could see more upside in the early half of the week. The next objective for Dec Cotton is weekly resistance around 59.00.
In the first half of last week, crude oil retreated from the perceived top of the range at $60. Friday and Monday saw a sharp rally off supply concerns. Fears that a new storm in the Gulf of Mexico would disrupt production and that demand might outstrip production in the 2nd half of the year kindled the rally. The extreme low in momentum on Wednesday/Thursday led to Friday's rally, which saw follow-through on Tuesday.
For the coming week, look for a retest of the $60 area. I continue to believe that crude will have trouble taking out the $60 resistance. As momentum is at an extreme high, I'm looking for the $60 area to be rejected again with a sell-off (possibly) corresponding to the release of crude inventory numbers on Thursday. However, weather in the Gulf of Mexico remains a wildcard.
As the latest confirmed US case of mad cow hit the news, August Cattle moved lower last week. In addition, big feedlot supplies have let packers run down prices. Last week saw a retest of support in the low 79 area. The momentum low and slight bullish divergence in MACD indicated a rally was coming, and Tuesday's violation of the May/June downtrend line brought in more buyers.
For the coming week, clearing 81.00 is the first key to a further advance. A rally to 82.00 fills in the June chart gap, and 82.92 would be a 50 percent retracement of the May/June sell-off.
Commodity funds are the dominant driver in the grain markets. They are estimated to have liquidated about two-thirds of their long positions in beans last week, driving November soybeans down nearly $1.10 at one point. This sell-off occurred in spite of continued dry weather in much of the soybean belt. Beans staged a sharp recovery Friday and Tuesday as 4th of July weekend rains were disappointing. However, remember that the soybean crop is made in August, not July, so there is still time to produce a good crop.
For the coming week, the sharp rally in beans appears intent on testing recent highs near $7.75 basis November. The extreme high in momentum makes it look unlikely that this two day rally will be able to extend much further without a correction. I'm looking for a rally and reversal on Wednesday and then a sell-off into next weekend.
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