Stocks, Oil, US Dollar Update

5-5-12 Weekend Update

Expect follow through to the downside next week.  Smart money sold stocks heavily on the attempted breakout this past week and pushed prices lower.

Oil Update

Click on Chart to Enlarge

This is a USO daily chart.  The blue rising trendline is set to be broken with a gap down today.  Trendline breaks with gap downs are often very significant.  Still many times there may be a backtest of the trendline, but this could likely be the signal that oil is set for a deep decline.  I would guess a rapid move down to the December lows which is the first major support.

Check out the ADX and bollinger band set-up on this.  I have talked about this before.  The daily ADX has been < 20 for about 6 weeks and the bollinger bands are squeezed tight.  An opening gap down with a close below the lower band with the bands expanding often leads to an explosive though often short term (1-2 weeks) move down.

Note the daily stochastics is also just turning down from overbought.  All in all a nice short/put option set-up.

Pullback to Continue?

Russell 2000 60 min Chart

This chart is the Russell 2000 hourly chart.  It reversed hard off of a tight harmonic resistance zone yesterday and has a beautiful bearish divergence on the hourly technical indicators.  The daily chart has the look of a small head and shoulder top pattern developing with the neckline at 785 and the high at 850.  That implies a possible 65 point move below 785 if the markets were to break down from here.

The daily charts of the the SPX and DJX touched the upper bollinger bands yesterday as well and then reversed.  All the gap down of the move down since early April have been filled.  The daily technical set-up is solid for a retest and failed breakout of the April high.

I believe the odds favor a resumption of a corrective decline from this point.

The EUR/USD has reacted strongly downward from the end of a possible triangle pattern on the daily chart as highlighted in the previous post.  Further declines there would pull commodities down and likely correlate with falling stock prices as well.

Market Update - Short Trade Set-Up

Euro/USD Daily

The Euro/USD pair is at its daily upper bollinger band and below resistance in what could be a symmetrical or descending triangle.  The daily stochastics is back in overbought territory at a lower high.  The shorter term 2 hr chart is showing bearish divergence on the MACD.  So the set-up seems plausible here for a top with a technical triangle breakout chart target to slightly below the December lows in the Euro.  A move above the early April highs would negate this scenario.  Stops could be placed at that level if trading the triangle pattern for a downside move from here.

 

SPY Hourly

The S&P 500 is back to just under the unfilled gap at 139.80 which is also a harmonic resistance zone.  The hourly MACD and stochastics are overbought but may need to create some bearish divergence before a downtrend develops.  On an objective basis thus far, the rally off the April lows has taken over twice as long as the decline from the April highs.  So the downside still has the "power" on that basis.  It is reasonable to expect further declines to new corrective lows on that basis. 

 

Equity Put/Call Ratio

The equity put/call ratio is signaling a short-trade set-up here for a short to intermediate term downtrend.  The 10 day average dropped below the 63 day average as of yesterday.  This is occurring with the 63 day average having recently turned up indicating a possible intermediate downtrend.  A similar occurrence happened a year ago in early April as the market was moving into it high prior to a major correction.

The 252 day average is still moving higher ever so slightly which is indicative of a long term price downtrend typically.  This is despite a major rally in stocks.  So this may be a divergence of sorts with bearish long term implications.  But that remains to be seen.

Stock Update

4-17-12 Update

Probable short term rebound followed by downtrend continuation.

Wedge Line Broken on S&P 500

Click on Chart to Enlarge

See the notes on the chart above.  The break of the uptrend line is an initial warning that the uptrend may be complete.  A fast break of 1340 would be further indication that a high may be in place.

The NYSE, Russell 2000, and Dow 30 are all also under their corresponding trendlines. 

It may be wise to wait for a rebound for the stochastics to move back above 50 and then make a bearish cross before considering bearish trades.

Leg Up Topped in Stocks?

The declines today in widespread equity markets were significant from my point of view.  The price logic in some world markets and in the Russell 2000 have shifted to downward configuration on hourly and some daily time frames.

The Russell 2000 gapped down and opened below its upward trendline off the Oct 2011 lows.  Gap downs below trendlines are often significant where a simple move to or below a trendline may not be.

Also, both gold and oil are positioned on the daily chart with low closes below the lower bollinger band and the bollinger bands are expanding.  This configuration has the potential for sharp declines, though possibly short-lived.

I expect further correction in stocks from these levels.  I expect the US Dollar index to rise and the Euro to fall.  The upward move today in the dollar index provides some reasonable early confirmation of a completed correction of the upward trend.  A move above the Feb highs in the Dollar index within the next week would be excellent further confirmation of a new leg up in effect.