A lot happened in 2017. Let's look at the charts and let them tell the story. I am going to take a look at some markets on a couple of different time frames and then discuss possibilities for this year (and beyond).
Note: A "daily" chart means that each vertical bar is equal to one day's trading. A "monthly" chart means that each bar represents one month of trading. You can see the time scale at the bottom of the chart. Generally I have the daily charts set to just show 2017 and the monthly charts go much further back.
Stocks
The S&P was up 20% on the year. Every month was positive (on a total-return basis) for the first time in history. The Dow was up 25% and the NASDAQ was up 29%.
On the daily chart of the ES, we see an investor's dream. A clean, smooth rally. Pullbacks were mild and were followed by relatively quick returns to fresh all-time highs:
The monthly chart, with the exception of the Crash of '08, shows largely the same picture. Note that not all 12 months are green on this chart because these are the futures:
With stocks in the US being a big winner, a big loser was obviously volatility. There were a couple of spikes, but ultimately more lower lows and lower highs. The lows were record-setting, and the highs may have provided temporary hope to traders, but betting that a more exciting epoch was beginning would have led to sustained losses. We will see what happens in the beginning of 2018 following the end-of-year spike:
What next?
A trend in motion tends to stay in motion. There have been so many fundamental "reasons" to get short stocks over the past 8 years that it is impossible to keep track of. As long as the trend remains strong, stay long.
Be on the look out for any major topping patterns. Divergence (RSI, MACD) and declining volume seem to have lost their significance in a lot of this rally. If financial stocks begin to roll over, however, that could be an early warning sign.
Currencies
The US dollar was down this year against the majors, posting its biggest loss since 2003. Losing about 10.5%, exceptional weakness was seen against the euro and the British pound. Let's check out the charts.
Note: All charts are of the futures contracts, so they are against the US dollar. Meaning as one of these charts goes up, it means that currency is gaining relative to the US dollar. This can be a difficult topic for people to grasp, especially since in the spot market it is often the opposite, so just ask and I can explain further.
The Australian dollar's place was in the middle of the pack. It started the year strong, corrected, rallied, corrected, and then posted a nice year-end push higher. The .81 level (one Aussie dollar buys .81 US dollars) was breached in Q3, but was unable to hold:
I am bearish on the longer-term outlook for this currency. We are forming a possible rising wedge, as highlighted, on the monthly chart. Given that the trend leading up to this (until 2015) was down, this has bearish implications. To briefly dive into the fundamentals, it is relative central back policy that moves currencies. The Fed is set to continue raising rates into 2018, which will help the US dollar hold its ground. Monthly Aussie dollar chart:
The British pound was strong this year. Many higher highs and higher lows. 1.37 was almost touched (meaning at that time, one pound could buy 1.37 US dollars). There are a couple of lower trendlines to keep an eye on into the new year:
Similar to the Aussie dollar above, the pound is moving lower into a bullish formation. Here it is more channel-like than a wedge, but the message is the same. When the lower trendline is broken, expect lower prices:
Next up is the Canadian dollar. The year started off on a rough note for the loonie (not my nickname). After bottoming out in the .72 handle, the upper trendline was broken and a strong rally ensued. For most of Q4 we were seeing consolidation, but like the Aussie, a strong rally was posted at the end of the year. It is worth noting that both the Aussie and the Canadian dollar are commodity currencies, meaning that since they export a lot of gold and oil, respectively, their prices tend to have some correlation with those markets. Daily loonie chart:
Are we seeing bottoming out on the monthly chart or is this another downtrend leading to a wedge which could be followed by another leg lower? We see a bottom in 2015 here, right at .68. Since then, we have had a higher low and 2 higher highs:
The euro is the most heavily-weighted against the US dollar in the US dollar index. That is because it serves as the common currency for the Euro area. Its strength this year was largely responsible for the US dollar's weakness. From the opening bell (OK, the second opening bell), we saw a large, sustained rally that hardly looked back. Peaking at 1.21 in Q3, it fell back to test 1.16, held, and then rallied back to highs to close out the year:
The monthly chart bears little resemblance to the other majors. While we see the same decline up until 2015, the action since then was neutral until this year. What we are seeing so far is a classic rectangle that is reversing the trend. Will this break above resistance hold?
The Japanese yen was the most boring of the majors. Volatility is cyclical, so that might mean we will see some better trading conditions this year. There were three major highs put in this year, the last being the highest, above .0093. However following that peak, we saw a decline back to support around .00875. Essentially what we see here is an early-year rally to a large sideways pattern. Interestingly, it appears as if a triangle is forming now, as the trendlines delineate:
Zooming out a bit, we can see that a major low was put in at .007945 back in 2015. Last year was a strong one for the yen until the last few months. That decline led into this year's consolidation. It is extremely difficult to determine if this is just a pause in a huge downtrend, or a pending reversal. We have the higher low, but we need to see sustained trading above .01 before being long is advisable:
Finally we are going to look at the Swiss franc. The daily chart looks most similar to the Aussie dollar, which is odd because the two have little in common. Sometimes that is just how things are though; just because there is correlation doesn't mean that there is a reason for it. We see a brief push above 1.06 in the summer, but the market fell back to parity, held that, then rallied (parity is 1, meaning 1 franc buys 1 dollar). We are seeing higher highs and higher lows now:
Trading activity in the last five-ish years in the franc, to be frank, has sucked. During the European sovereign debt crisis in 2011 it spiked to 1.4167, but following that, it has been a long, dull, sideways market:
So those are some of the major US dollar components. Let's now look at the actual dollar (I'll look at the US dollar ETF, $UUP). The monthly chart shows a strong rally in 2014 and the beginning of 2015. We saw another leg to a high in 2016, but 2017 was a year of declines, with a major low being put in. This low was put in at a critical level, so it is going to be interesting to see if it holds:
What next?
The USD might be forming a broadening formation, as evidenced by the higher highs and lower lows seen since 2015. I think it is likely that at least a temporary low is put and and we see a push back into the center of this formation.
The Aussie dollar, British pound, and Canadian dollar are all forming potentially bearish wedges or channels. They are bearish because they are against the prevailing trend, which is down.
The euro is currently above resistance from the rectangle that it broke out of. As long as that level holds, the picture is bullish.
The yen has been very sideways this year and is forming a symmetrical triangle right now, I want to wait and see how we break out from that.
Finally, the Swiss franc has been extremely rangebound for years, and until a decisive move is made, there is no reason to expect that to change.
Energy
Oil began the year rangebound between about $51 and $54. Consensus was that this was a fair price range. We saw a breakdown to the $47 handle, and then a rally back into the previous range. That topped out in the middle of the $53 handle. From there, 2 declines took us to what would be the low of the year, at $42. A strong rally ensued for the second half of the year, closing out above $60:
The monthly chart of crude oil is one of my favorites at the moment. A massive, complex head and shoulders pattern has formed. There are 2 shoulders on each side of the head. Following the completion of the final shoulder, we have had 4 months of gains. The target on this move is around $68, but there is a lot of resistance higher than that which may be tested:
Natural gas was a boring market this year. A decline at the end of last winter was followed by a rally, and then another decline into a consolidation pattern that lasted for most of the year:
The monthly chart doesn't look much more exciting, unless you're including the crazy spikes in 2005 and 2008. More recently, however, the market has been anything but exciting. This year was especially dull, as the last 12 bars attest to:
Oil looks set to continue its rally. The trend is up and the head and shoulders pattern is playing out. It would take a major fundamental shift to turn things around.
Until natural gas breaks away from the year's range, I expect it to continue to be boring. There might be some heightened volatility in January and February.
Gold
The year in gold was positive, with a rally taking it from $1130 to $1320. An intermediate high was reached above $1360 in September. The rally started on day one of 2017. It can be broken down into multiple waves, with generally higher highs and higher lows. In July a decisive bottom was put in, and then a rally to the year's high followed. A decline into a rising broadening formation led to a breakdown to $1240 in December, but those losses were recouped and then some:
Looking at the bigger picture, things seem more ambiguous. Since the massive rally from 2006 until 2011, we have seen a decline and then a multi-year sideways formation. Will this result in a continuation higher or a reversal? I think that is a difficult call to make right now. We would need to see a move above $1400 or below $1125. One other thing to consider on this chart is the ascending triangle that is forming. That would have bullish implications:
What Next?
I lean toward being slightly bullish here on account of 2 things: the long-term trend is up and an ascending triangle is forming. Should we break out from that, the target would be roughly $1700.
Treasuries
Yield on the 10-year note ended 2017 at 2.41%, not too far from where it began. The 10-year initially rallied, but fell to test lows in March. That was the low on the year. A strong rally ensued, and then 2 more waves took us up to highs in the upper 127 handle. Since then, an extended decline has taken place, almost bringing the market back to where it began. Since mid-October, a bearish sort of wedge has been forming. That is interesting because generally this pattern forms against the prevailing trend, but in this case, it is moving with the trend:
Longer-term, the 10-year is sitting above a major support level, as marked. This is right around the 122 handle. An older, upward-sloping trendline was also tested this past year:
What next?
With the Fed expected to continue raising rates in 2018, I think it is likely that the support level around 122 is tested. It is possible that the market then turns higher to test the upper trendline. Overall, the trend here is not clear and it is a wait-and-see situation.
Agriculture
A mixed bag in the grain markets this year. We will look at corn, soybeans, and wheat.
Corn began the year with an uptrend. A breakdown from its high led to yet another uptrend, which eventually took it to 417. A sharp decline followed, and then a wedge formation formed. We saw a breakdown from that to the low on the year at 336. A push from that and a gap higher led to the range that we closed the year in. The trendline that markets the upper boundary of that wedge could still be in play in 2018:
Corn was an exciting market to be in before 2014. Since then, like we have seen in a few other markets, an extended consolidation pattern has taken hold. This one appears to be a rectangle. It is worth nothing that the highs are getting lower, however. 300 is a major support level:
Soybeans were all over the map. A rally started the year off, putting in a high at 1080. For the rest of the first half of the year, the market declined to a low at 900. A sharp rally followed, and then we saw a decline back to a HL. Since then a channel has been building:
Things look a bit more interesting on the monthly. This year was part of what appears to be a multiyear symmetrical triangle, which means we should expect a move soon, as we are approaching the apex:
Aside from a massive rally which was immediately retraced, wheat had a pretty boring year too. Following the sharp decline from the 575 high, a bottom was put in again at 400. That will likely be an important level going forward. We bounced from that and then entered a down channel, which we are trading in now. A breach of the upper trend line may be beginning:
Wheat is also in a long-term downtrend that has come to a halt at that 400 level. Last year it was breached, but could not sustain trade below it. After testing it once this year, we had that sharp rally, but immediately came down to retest it. Since then we have been hovering above it:
What next?
Corn is trading sideways and there is no reason to expect that to change until we see a breakout. Soybeans look to be approaching the apex, and thus the breakout, of a triangle. The trend in wheat is lower, but 400 is a level to watch.
Disclaimer: Futures trading involves a substantial risk of loss. Nothing here should be taken as a recommendation. If you need trade recommendations, then you should probably not even be trading.
