Decline in China’s Exports Puts Pressure on U.S. Equity Markets

Decline in China’s Exports Puts Pressure on U.S. Equity Markets
March 8th, 2016

U.S. Equity Markets

I am currently on the sidelines in the U.S. equity markets.

The U.S. equity markets are extremely overbought on the daily and weekly charts. I am looking for another big push up, however there is a significant amount of overhead resistance on the Dow Jones Industrial Average all the way up to the 18,300 level. With the current weakness of economies worldwide I do not expect the U.S. equity markets to push all the way through this heavy resistance. If the U.S. equity markets do get another big push up I would be looking to exit any long positions in equities, mutual funds, and/or exchange traded funds. I would also be looking to buy the exchange traded funds which move in the opposite direction of the U.S. equity markets and short the exchange traded funds which mirror the U.S. equity markets. The exchange traded funds which move in the opposite direction of the U.S. equity markets include DOG (Dow Jones Industrial Average), PSQ (NASDAQ Composite), SH (S&P 500), and RWM (Russell 2000). The exchange traded funds which mirror the U.S. equity markets include DIA (Dow Jones Industrial Average), QQQ (NASDAQ Composite), SPY (S&P 500), and IWM (Russell 2000). I am looking for further price action in the U.S. equity markets to help me pinpoint the range where I would be looking to do so. I do not support being complacent and following the buy and hold mentality. One must understand when it is the right time to take money off the table.

At Friday’s close I thought I got I got a buy signal for the U.S. equity markets on the weekly charts, however I did not get this signal. I will get a buy signal on the weekly charts if the S&P 500 futures close above the 2,009.75 level on a weekly basis. I will also get a buy signal on the weekly chart if the exchange traded fund SPY closes above the 200.51 level on a weekly basis. If I get these buy signals I expect a rally in the U.S. equity markets lasting 2-10 weeks, pushing them up into a range (possibly the 17,500-18,100 range on the Dow Jones Industrial Average) where I would be looking to exit any long positions in equities, mutual funds, and/or exchange traded funds, buy the exchange traded funds which move in the opposite direction of the U.S. equity markets, and short the exchange traded funds which mirror the U.S. equity markets.

There are currently three gaps below on the exchange traded fund SPY. These gaps go down to the 182.86 level, equivalent to approximately the 15,500 level on the Dow Jones Industrial Average. I believe these gaps below will get filled by sometime this summer. Once filled I believe there is a good chance the U.S. equity markets will continue pushing down to new lows for 2016.

2015 was a year of volatility and I believe 2016 will be a year of aberrations and volatility. In 2016 I expect to see aberrations in the U.S. equity markets to both significant overbought and significant oversold conditions, providing both buying and shorting opportunities. I expect to see similar opportunities to when the S&P 500 futures traded down to a low of 1802.50 on February 11th. At this low the S&P 500 futures were at an extreme oversold condition, over 80 points below the 10-bar moving average on the daily chart. From this extreme oversold condition the S&P 500 futures rallied over 200 points to a high of 2007.50 on March 4th.

Last week I had been looking for the Dow Jones Industrial Average to get up into the 17,100-17,700 range. I cancelled this range because of the upcoming European Central Bank (ECB) policy meeting on Thursday, March 10th. I believe that the U.S. equity markets have rallied the past couple weeks in anticipation that Mario Draghi and the ECB will choose to enact additional quantitative easing. This rally has also been fueled by a significant amount of short covering. It is expected that the ECB will choose to further cut the deposit rate. I am waiting on the announcement of this meeting at 8:30am Thursday morning before I would be looking to enter the U.S. equity markets. If the ECB decides to enact more quantitative easing than expected it could put more fear into the markets as it could be a sign that the European economy is worse than it seems. If the ECB decides to enact less quantitative easing than expected it could also put more fear into the markets as it could be a sign that the ECB is running out of bullets. On March 15th the Federal Open Market Committee (FOMC) will be holding its next meeting. I do not expect the FOMC to choose to raise the federal funds rate at this meeting.

Last night China reported a decline in exports of 25.4% in the month of February. This is a staggering number, showing further evidence of a worldwide economic slowdown. Japan has also recently seen a decline in bank lending and consumer spending. The U.S. equity markets sold off today, fueled by the worse than expected decline in Chinese exports. After selling off sharply this morning the U.S. equity markets began to rally into the afternoon. This rally failed to bring the U.S. equity markets back into positive territory and late afternoon the U.S. equity markets sold off sharply, pushing down to new lows for the day.

The Dow Jones Industrial Average closed down 109.85 (0.64%) at 16,964.10, the NASDAQ Composite closed down 59.43 (1.26%) at 4,648.82, the S&P 500 closed down 22.50 (1.12%) at 1,979,26, and the Russell 2000 closed down 26.27 (2.40%) at 1,067.88.

Follow Steve on Twitter at @stevekalayjian

Crude Oil

I am currently on the sidelines in crude oil.

Crude oil inventories are at a record high (over one billion barrels worldwide) and are increasing further with production continuing to outpace demand. In addition Iran is continuing to increase its production until they at least reach pre-sanction levels. It has been reported that OPEC and non OPEC producers will meet sometime in late March-early April to discuss a possible production freeze. On February 11th crude oil traded down to a low of 26.05 for 2016. Crude oil prices rallied over 40% from that low trading up to a high of 38.11 yesterday. Much of this move up can be attributed to significant short covering. I do not believe we have seen the bottom in crude oil. I believe crude oil will begin heading back down sharply and that there is a good chance crude oil will make a new low for 2016 in the months ahead, potentially in the 18-22 range. At that point I believe OPEC will look to cut production, making an intermediate term bottom in crude oil. I also expect there to be a significant buying opportunity if crude oil gets to that level. I would be looking at names such as MRO (Marathon Oil) and SWN (Southwestern Energy) that have been beaten down over the last couple months.

At 4:30pm the American Petroleum Institute (API) report showed an increase in crude oil inventories by 4.4 million barrels from the prior week, higher than the expected increase of 3.0 million barrels. Crude oil pushed up slightly following the release of this report.

Crude oil was down 1.65 (4.34%) today, closing at 36.33.

Follow Steve on Twitter at @stevekalayjian

Gold

I am currently on the sidelines in gold.

On February 5th I got a buy signal on the weekly chart for gold with the close above the 1,131.30 level. In early February I was looking to buy gold in the 1,175-1,190 range. On February 16th gold pulled in to a low of 1,191.50, however it did not enter my range. I am looking for gold to make a higher low in the upcoming weeks, possibly in the 1,200-1,225 range, where I would be looking for an opportunity to get long. Gold rallied over 140 points from where I got the buy signal on the weekly chart, trading up to a high for 2016 of 1,280.70 on March 4th. I believe the next push up in gold should bring it to or above the 1,300 level.

Gold was down 6.0 (0.47%) today, closing at 1262.00.

Long Term Signals:

SLV (Silver ETF): Buy Signal on Daily Chart (03/07/16)
Entries: 14.58, 14.42, 14.24
Stop: 14.01
Status: No Fills

GG (Goldcorp): Buy Signal on Daily Chart (03/08/16)
Entries: 15.46 (filled), 15.00, 14.54
Stop: 13.90
Status: Long at 15.46

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