Weekly Market Wrap: 25 Jan 2013

This regular column serves as a review of general market conditions and this week covers stocks, commodities and precious metals.

Stocks

In the short-term the major stock market averages (and global risk assets more generally) look overbought. The chart below shows some simple trend channels overlaid on the Dow Jones Industrial Average.

Since the beginning of the year the market has been marching higher in a narrow channel, however yesterday it reached the top of both the mini blue channel, and the longer-term green channel.

A 40 day (60 min) chart of the Dow Jones Industrial Average (Click on the chart for a larger version)

A 40 day (60 min) chart of the Dow Jones Industrial Average (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The relative strength index or RSI (circled), shows that during the last few trading sessions the Dow became considerably overbought, though it has since pulled back somewhat. Meanwhile the Full Stochastic Oscillator (circled) shows that momentum may be turning back down.

All sectors of the US market, with the exception of Telecoms, look to be overbought and a short-term correction is due.

Although short-term conditions merit caution the bigger macro picture of ultra-easy monetary policy is likely to send stocks considerably higher overtime, at least in nominal terms.

Commodities

Natural Gas

In April 2012 the price of natural gas reached $1.90 per million British thermal units (BTUs), the lowest level since 2002. After that significant bottom the price then began a sustained rise of 110% to $4.00 per million BTUs. Now however, natural gas looks to have established a new downtrend.

A 1 year (daily) chart of Natural Gas (Click on the chart for a larger version)

A 1 year (daily) chart of Natural Gas (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Natural gas topped out earlier this week at the top of the new downtrend channel, and the negative momentum increased yesterday when the Energy Information Administration (EIA) reported a decline in US inventories that was smaller than had been priced in by the market.

Precious metals

Gold

A 6 month chart of gold, together with some medium-term trend channels, reveals that the yellow metal is still in the downtrend that began back in October 2012.

A 6 month (daily) chart of Gold (Click on the chart for a larger version)

A 6 month (daily) chart of Gold (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

In order to make any progress to the upside gold needs to break out above the upper purple trend line, however in the short-term, momentum looks to be turning back to the downside.

The longer-term picture for gold could scarcely be better. As already mentioned, since the financial crisis hit in 2008, the four largest central banks (the Fed, the ECB, the BoJ and the BoE), have printed $9 trillion, and they show no sign of stopping. In fact, Western governments have proven that they are willing to do whatever it takes to prevent another deflationary depression, as a result we can expect much more currency debasement in the months and years ahead.

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