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Friday, October 31, 2014

Daily udpate 10/31

New closing highs on SPX, DJ30, and the COMPX.  Here is the daily SPX chart.

This is an unprecedented pattern.  We have a very sharp V from below the 200 SMA to a new high without ever trading below a prior day's low.  It was nearly a 11% gain in 13 days.  I searched the entire history of DJ30 back to 1916 and there is nothing that looks even close to this.  According to TradeStation NYSE volume was 44% above yesterday.  Obviously there is a reasonable risk this will turn out to be an exhaustion gap.   If that is the case then a close by SPY below today's low would likely bring on some selling pressure.  Breadth was 74% positive.  There were 358 new highs and 59 new lows.  That is the most new highs since July 3rd.  It was right after that when the market internals started falling apart.  The new lows were quite elevated for a new high.  A caution flag to say the least.  There are two obvious patterns on this chart.  One is the possibility of a double top.  There is also a possible megaphone/expanded volatility/broadening top pattern forming.  Lets take a look at the monthly chart for a change.

We have a hanging man bar with a big volume surge.  Those bars need confirmation with a close below the low.  Given the fractured market internals that is certainly a possibility.  We have new highs on key indexes while there are only 57% NYSE and 47% NASDAQ stocks above their 200 SMAs.  The bullish percent indicator is 51% for both the NYSE and the NASDAQ.   Here is a look at the NYSE common stock advance-decline line.  Since this one is only common stocks a lot of the other things we don't care about are eliminated.

There is a triple divergence at the moment.  Obviously if the indexes keep going up this will clear up.  However, this is one of the best warning indicators of trouble along with the new high/low data there is.  This rally certainly has the look of a final blow off move.  While I am sure many of you think I am absolutely crazy we actually have right now every classic sign of a bull market top that I know about.  They always happen when things are as good as they are going to get.  That is why they are hard to recognize.  However, in this case the global economy is falling apart all around us so it is not really hard to see how this could be as good as it is going to get for now.

Next week is the election which normally has a positive bias into election day.  Unless there is some news event I would not expect any major selling until after Tues.  After that I think things will change dramatically.  There is an old saying that the bears get Thanksgiving and the bulls get Christmas.  This is caused by the wash sale tax rule.  A lot of people sell losers in Nov. to take the loss against any gains for the year.  They then buy them back more then 30 days later.  Some years when most stocks are up there is not much of an effect.  However, this year there are many stocks below their 200 SMAs and down 15% or more even with the current rally.  There could be more selling pressure then there was last year.  We saw that in both 2012 and 2011.

In How Long Can The Shale Revolution Last? I found these interesting comments.

The U.S. produced 8.5 million barrels of oil per day in July of this year -- 60 percent more than just three years earlier. That is also the highest rate of production in three decades.
Put another way, since 2011, the U.S. has added 3 million barrels per day in additional capacity to global supplies. Had that volume not come online, oil prices would surely be much higher than they currently are.

That has “revolutionized” the energy industry and geopolitics, as scores of energy analysts have claimed. The Energy Information Administration (EIA) forecasts that U.S. oil production will hit 9.6 million barrels per day (bpd) in 2019, and gradually decline to 7.5 million bpd by 2040.

This would allow the U.S. to be one of the world’s top oil producers for an extended period of time. With such an achievement now at hand, many analysts are predicting an era of American dominance in geopolitics. For example, in an op-ed on Oct. 20, columnist Joe Nocera considered a “world without OPEC,” in which U.S. oil production soon kills off the oil cartel.

Is the EIA forecast scaring Saudi Arabia and maybe other OPEC countries?  From what I have heard they seem to be intent on keeping U.S. oil off the world market.  Despite the price drop nobody is blinking when it comes to production cuts so far.  I believe they have the capacity to put a world of hurt on the U.S. fracking industry if they really wanted to.  I don't know if that is their intention or not since they would not publicly announce that.  I can see why they might want to though.  Its possible the battle is just beginning.  Since the oil boom appears to be largely driving the increase in jobs and is keeping the economy going it is important to watch what happens. 

I see somebody did a screen capture on the CNBC caption I noted last night.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.