Recap: Week Ending May 16, 2014
Markets across the board closed lower this week, trading back into their well established ranges from the past months. To the surprise of many, the Dow Jones Industrial Average was the weakest out of the three major US indexes. In recent times, the Dow has been a leader to the upside while the NASDAQ100 has lagged behind. The shift in momentum in the Dow may indicate the top in the market is near. It must also be noted that the Dow made new all time intraday highs, however, they were rejected by strong selling pressure. Markets in North America endured large selling pressure both Wednesday and Thursday following the new highs which were made by the Dow on Tuesday. Currently, the Dow is sitting at its 50 Day Simple Moving Average where it has found key support. To put it in perspective, the NASDAQ is trading roughly 30 points below its 50 day moving average where the S&P 500 is trading right at the moving average. Like its US counterparts, the TSX has seen strong selling pressure as of late with the index attempting to make new lows for the month of May. As mentioned in previous postings, the TSX MACD indicator, Moving Average Convergence-Divergence, is still showing a bearish cross indicating the further downside may still be in the books. When compared to US indexes, all three US majors are starting to form a bearish cross, indicating that a wave of selling pressure may enter the market. This is significant as a bearish cross at the same time may lead to an insync push lower with conviction leading to much lower lows. The next few trading days will dictate whether or not this cross will form, however if selling pressure continues the MACD will turn bearish.
Like equities, gold remains in a tight range. Since the middle of August, gold has been trading in just over a $40 range. The range comes as the 50 day moving average is about to cross below the 200 day moving average. This occurrence in moving averages is known as the cross of death as it indicates that average prices of the past 50 days are lower than the average price for the past 200 days. The possible cross of these two averages may send selling pressure into the markets, giving gold a much needed boost of volatility sending the market lower. The lack of movement in gold comes as the USD Index pushes higher to make new highs for the month of May. Usually an inverse correlation is seen between gold and the USD Index as gold is typically considered a hedge against inflation falling when the USD rises. On the other hand, it appears a flight to safety from the selloff in equities is being seen in US treasuries as the 30 year bond printed new highs for the 2014 calendar year. The 30 year appears to be targeting the 141 area which proved to be prior support for the security in February of 2013.
It must be noted that this upcoming weekend is a long weekend in Canada and markets will be closed Monday to celebrate Victoria Day. Because of the shortened week little action can be expected in Canadian markets as trading volumes typically are on the lighter side. The United States does not celebrate this holiday and their markets will not be affected.