The last five to six weeks have been quite painful for those who are bearish on equity markets, as they have been swept aside by a short squeeze which has been historic in nature. The US markets opened the year with its worst start on record in response to the rate hike of December 2015. This led many, including myself, to believe that a 2008 style year was on the cards.

My view is still that we are in a bear market, or at the very least in the midst of a real correction, the likes which haven’t been seen since 2012. This is based on the basic fact that the Federal Reserve, which has been the main driver of the now 7 year long bull market, has for at least 2 years taken its foot off the gas. The impetus for equity price appreciation has now gone, and it is still my base case that there will not be any new highs in the S&P 500 without the Federal Reserve going back on its current normalization path.

Janet Yellen may have already reversed course, given her extremely dovish speech at the Economic Club of New York last week. This reverse course has come in the shape of a reduction in the number of planned rate hikes for 2016, from four to two. It remains to be seen what actually happens, but if the Fed stays where it is, it is unlikely that prices much higher. Having said that, the rally from February 10 has been impressive. Below are two charts of the S&P 500 futures, over the last four years, and the last three months respectively:

ESWEEKLY ESFOURHOUR

The white moving average on all charts is a 55 period moving average. The top chart, a weekly chart spanning 4 years, shows that indeed the bull has at least come to a resting point over the last 18 months. Momentum, which is indicated at the bottom of the chart, has also stalled out and acted negatively over that time frame.

The main point of contentment for bulls is the failure of prices to break the 1800/1850 area, as indicated by the yellow band. Particularly impressive was the hold and sharp rebound in early February, which has been the genesis of the current rally. This rally is highlighted in the second chart above. It has been quite orderly, respecting the moving average as it slogs higher, further demoralizing bears. It is at a key area though. If the bears are to remain in control, price is going to have to stall out here and reverse lower. Should we see 2100 again, it will surely be the time to throw in the towel in terms of shorting the market. It wouldn’t necessarily be a time to open new long term positions, given the flirtation all time highs, but it would be a significant defeat for those looking for a significant correction to the long term bull. As a result, I believe that the next few weeks of price action will be Incredibly important.

 

Crude Oil Futures

 

The following is a chart of Crude Oil over the last 20 years or so:

CLWEEKLY

The devastating move lower since 2014 has been one of the major talking points in finance. On a technical basis, I believe that the easy money has already been made on the short side, and there is a limited downside to come from here, at least in terms of a nominal price decline. As you can see, I’ve drawn in levels at $25 and $17ish, which are roughly 30-60% away from current levels. That is no slouch in terms of profit potential.

My current view is that price ‘wants’ to see something in the low $20s, and perhaps even lower if there is a capitulation type of move. It would make sense technically as well, given the fact that $25 is a major bottom, as is the $17/18 area. $20 is a major psychological level as well.

CLDAILY

CLFOURHOUR

Having said that, there is a lot of talk about the bottom in Crude, which is why I suggested that the ‘easy’ money has been made already on the short side. There is constant talk of production freezes and reductions, which are meant to boost prices. I do think the simple fundamentals are going to prevent any material price increases for now, and the technicals support that as well. The top of the two charts show the action over the last 12 months, which is decidedly bearish.

The bottom chart shows the current upswing, which like the one in stocks began in early February. Price is currently at an extremely important level, $36ish. A break below would probably see prices quickly deteriorate, back towards $31. Holding at these levels and trending back towards the $40s may indicate that a legitimate respite from falling crude oil prices may in fact be on.

Gold

 

GOLD WEEKLY

The above weekly chart represents the last 4.5 years of action, all of it spent declining from the peak of 1923 in September of 2011. As you can see, it has respected the moving average up until the beginning of this year, when it spiked higher. A closer look at the move below:

GOLDDAILY

I’m inclined to believe that gold has made a secular bottom, and will now resume the uptrend that it began way back in 2001. In terms of a shorter term outlook, the move from 1050 to 1287 is in the process of being retraced. I’ve highlighted a band which should be instructive. Holding those levels and making a further high from here should confirm that the bull market is back on. Breaking back lower towards 1050 suggests it hasn’t begun just yet.

 

US Dollar

 

DOLLARWEEKLY

DOLLARDAILY

Another of the major talking points in finance over the last four years has been the performance of the US dollar. It has been a one way street for 4+ years, going higher, as is shown in the first chart. The second chart shows the churn prices have faced over the last 18 months or so.

Telling price action for me was the move to new highs in late 2015 followed by an abrupt reaction lower. This suggests to me that the next major move in the Dollar Index is lower, and price is seemingly in the process of travelling along that path. Early targets are the range lows at 92, and failing that, the area between 86 and 90 is one of great interest.

 

Until next week, happy trading.