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Wednesday, February 4, 2015

Daily update 2/4 Mini crash coming?

Just when bulls started to think they had won the battle the bears took over again.  Here is the SPX chart.

With less then 30 minutes to go SPX was well above the upper trend line and moving up.  The about face and drop into the close was credited to news that a Greek debt deal might not be so close to happening after all.  Remember news on a possible deal was the catalyst for this bounce in the first place.  That premise was removed and so they sold.  The breadth was 62% negative indicating selling was fairly broad based.  There were 131 new highs and 18 new lows.  New highs appear to be dropping off considerably.  I think that indicates the bulls are losing their nerve (who can blame them).  SPX closed back below the 50 DMA.  If we follow through on the downside here this would be a third rejection at the 50.  I am a little hard pressed to see how that would not spark some extra selling pressure.  While the dip buyers have kept showing up they have not gotten rewarded yet.  They have been buying for two months.  That is a lot of potential downside fuel should they give up and sell.  Here is a look at the futures chart.

Notice the futures closed back below the 100 and 200 SMAs.  On the last two bounces that meant the rally was over.  They dropped another 10 points or so after the close.  I would guess that was on disappointing earnings news.  The ADX had a negative crossover and the MACD turned down again.  That adds confirmation to the idea the bounce is over.  I want to peek in on the SPY 60 minute chart tonight.

Notice the big green volume bars on the latest bounce compared to the two previous bounces.  They are smaller and much fewer in number.  I think this bounce might have been more about short covering then fresh longs.  At any rate I don't believe there was much conviction by the bulls.  That was quite a reversal at the end of the day.

The odds of a reversal at the upper trend were pretty good and that appears to be playing out.  The futures are down at the moment, but that could change by morning.  If we have downside follow through tomorrow I think we are likely to end up breaking down below SPX 2000 for real this time.  We were in a short term overbought condition and we have three rejections at the 50 DMA.  Is it unreasonable to expect considerable weakness from such a setup?  If the bulls are going to save it they need to show up in force tomorrow.

Watching the oil situation has been fascinating.  On this massive bounce the pundits on TV have been out proclaiming the bottom for oil is essentially in.  Although most admit there will be plenty of volatility and prices might slip a bit lower at some point.  None of these pundits appeared to be actual oil traders.  When they interview somebody from the oil pits at NYMEX the story is completely different.  They remind people that dropping the drilling rig count is not the same as shutting down producing wells.  The traders there all seem to expect lower prices yet to come.  Who do you believe the largely bond and equity traders or the oil people?  I am going to side with the oil guys.  They are absolutely correct that it is production that counts not rig count.  Here is what Bespoke had to say about the oil inventory data released today.

In order to fully grasp the magnitude of the recent builds in crude oil inventories, we would note that over the last four weeks total stockpiles have increased by 30.667 million barrels.  The chart below shows the rolling four-week changes in US crude oil inventories going back to 1983.  As shown, at no other point in the last 32 years have crude oil inventories seen a bigger increase over a four-week period.

Here is a look at the chart they are talking about.

Commodities are not stocks.  They respond to actual supply and demand data.  I think the builds will have to stop before a true bottom happens.  With central banks around the world easing (something like 15 banks have acted recently) it is clear the global economy is slowing dramatically (reducing demand).  Meanwhile supply is still increasing.  Not the normal combination for a commodity price bottom.  Look out below.

This is a rather interesting chart I have never seen before.


Bull markets usually thin out considerably as they come to an end.  This is an attempt to put that into a chart.  Normally the number of stocks above their 200 DMA tracks reasonably close to the major indexes going up and down.  When the number of stocks gets below 50% and the market keeps going up it is doing so on fumes.  I have known that for years, but never thought of looking at with the correlation to SPX.  This is the longest the correlation has been negative in the last 20 years.  Yet another warning sign of potential trouble.


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