Hey guys/girls you might remember me from last week. I got a fair share of positive reviews on our write up from last week, If you missed it last week you can view it here: Market Outlook 4/11-4/15/2016
You can read it HERE with embedded images or view the text version below.
Market Summary
This week we saw a grind to the upside in the markets as investors continue to go long. While the charts look bullish there are some concerns. Volatility and volume are overall low. Very low. Even on average volume days the volatility was quite suppressed which shows that the sideways action we are experiencing could be coming to an end. This is not necessarily bullish or bearish, it is moreso a sign that the markets are waiting on something. Complacency can’t continue forever, even if it can go on for quite a while. Regardless, many of the bearish trendlines are broken across the market, so the bearish case is well battered and bruised in the face of the upward melt. The only thing that can bring it down is a drawn-out selloff in oil.
A note on Volatility
While we may see volatility at near lifetime lows in many of the index products, we must respect that on Friday the move was exactly within the predicted by the insanely low vol. So even though everyone knows volatility must revert at some point, nobody knows when, and inventorying long volatility is incredibly expensive. Be careful with products like UVXY and TVIX as they can reach into your pocket and steal all your sweet rolls if you time them poorly. Long term holding of these products is even worse as the leverage drag starts to crush any chance of making up your losses without a pronounced and outsized move in the indexes.
Deciding Factors for Next Week
This weekend the top oil producing nations (including Saudi Arabia, Iran, Russia) met in Doha, Qatar to discuss a possible freeze on oil output. The meeting was this Sunday (4/17). To no surprise these nations were not able to come to an agreement. The meeting ended up being a near bust, and ended just hours after beginning. This is not a positive outlook going forward because if these nations struggle to agree on freezing production, it may be very difficult when the time comes to cut production, if applicable.
SPX Overview
Last week the SPX was neutral. Despite multiple market attempts to move, all intraday pressure was to the unchanged side. Beige continues in the SPX, Janet Yellen must be so proud. We said to look for support at the 200 SMA and for resistance at 2,080. Heading into Monday we are starting to look slightly bullish. As stated last week, “The key for this rally to turn into a reversal is for 2,072-75 to become support instead of resistance. From there the markets will be able to move forward.” If you look ever since the S&P busted through and broke 2,075 (blue line) and it has been using it as a support line since. In addition the MACYD remains above the 0 line holding the bullish trend and this week the stochRSI broke the 20 line, putting it into a bullish trend as well. The 10 SMA (green) and 20 (orange) are already above the 200 but now the 50 is also coming up and starting to positively slope a lot. Heading into next week look for support at 2,062, 2,075 as well as resistance at 2,092 and 2,103. The 2,080 line will work as a pivot point. The biggest thing that can break the possible bullish cycle is the OPEC meeting, which seems bearish from early reports. Considering this did not go over very well there could be a major selloff in oil which could also bring the markets down with it.
Something else to take into consideration was the consolidation that SPX went through two weeks ago. Typically if the market consolidates before a major trendline and continues to push forward afterwards, it shows that it has strength going into that trendline with enough power to break it. One last thing to keep in mind are the movements of other indices like Dow Jones Industrial ($DJI), and the Russell 2000 ($RUT). Both of these are sitting at major trendlines/price levels. They approached these levels last week and it resulted in little to no giveback. Given that they are showing strength at these levels, we could see some major breaks here.
Commodities (Technical Analysis):
Natural Gas, /NG
This is the chart from last week. Last weekend for Natural Gas we compared it to a very similar setup that it was previously in. This setup gave us a bearish bias for NG and it ended up closing down over 4% this week. The more important thing we pointed out was that NG was in a wedge pattern. When something is in a wedge pattern that sets it up for a breakout. Let’s take a close look to see how this played out.
The white arrow is where we made the call last week. You can see it played almost perfectly inside of the wedge until it finally broke to the downside. The previous slight break above was around 2 AM, and did not confirm a breakout. The break to the downside closed below, a lot more significant. In addition if you pull up the daily charts for this week, the fast MACD has dropped below the zero line and the slow is about to as well. In addition the stochRSI has broken below the 20 line meaning it has entered a bearish trend. This leaves us slightly bearish heading into next week.
Oil, /CL
Last week were we bullish oil and said, “With the bullish indicators it looks like a test for the 200 SMA is quite possible.” As you can see, oil gapped right up to the 200 SMA. Which is the first time it has broken it in roughly 14 months. Since the low at $26, oil has been making higher highs and higher lows, which is shown with the yellow lines. However, recently on the last pullback to 35.20, oil actually made lower lows and then on the rally, the highs were slightly lower as well. This can be mean a couple of things, it is either in a downtrend or it is forming a channel. Regardless, oil just close below the 200 SMA, had a negative cross on the MACD, and the K period broke 80 on the stochRSI which leans towards it heading down. On a technical level we are bearish oil heading into next week.
Gold, /GC
Last week we noted that, “Gold is looking bullish here,” and it ended up making a nice run from 1,240 to about 1,265 where it was rejected. While we were bullish gold we also made note “Gold seems to be potentially channeling so do not expect new 52 week highs without some sort of a catalyst.” This is exactly what gold seems to be doing right now, forming a channel. Look for support at 1,210 and resistance at 1,245 and 1,265. Right now the MACD is below the 0 line and the stochRSI has broken below 80 and is heading for 20. On the other hand, the moving averages continue to look bullish as the 10 actually broke above the 20 which is bullish; and the moving averages are actually in the Steph Curry pattern. For those that haven’t seen some of our lessons or quick analyses, this is our own funny way of saying that the 10 SMA is above the 20 SMA, both are above the 50 SMA, all three are above the 100 SMA, which are all above the 200 SMA. So overall gold is in a bullish trend; however, expect a small pullback. With the conflicting indicators this week, we are staying neutral on gold.