Look Out Below, These Gaps Should Get Filled

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

There are three gaps below on the daily chart of the exchange traded fund SPY. These gaps go down to the 182.86 level, equivalent to 900 points below today’s close on the Dow Jones Industrial Average. I am hoping that the U.S. equity markets continue to push upward and get to an extreme overbought condition where I would be looking to short the exchange traded funds which mirror the U.S. equity markets. These exchange traded funds include DIA (mirrors Dow Jones Industrial Average), QQQ (mirrors NASDAQ Composite), SPY (mirrors S&P 500), and IWM (mirrors Russell-2000). I would then be looking for the U.S. equity markets to work off the extreme overbought condition as they fill these gaps below within a 1-6 week time period.

Going into today, the Dow Jones Industrial Average had rallied almost 800 points with three straight days with gains of 1% or greater. Today that streak was broken with the Dow Jones Industrial Average closing down 40 points, failing to post gains of 1% or greater for four consecutive days. The last time the Dow Jones Industrial Average had gains of 1% or greater for four or more consecutive days was in 1982.

The Dow Jones Industrial Average closed down 40.40 (0.25%) at 16,413.43, the NASDAQ Composite closed down 46.53 (1.03%) at 4,487.54, the S&P 500 closed down 8.99 (0.47%) at 1,917.83, and the Russell-2000 closed down 6.43 (0.64%) at 1,004.71.

SPY_DailyGaps_021816-price
Three Gaps Below on SPY Daily Chart

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Crude Oil

I am currently on the sidelines in crude oil.

I do not think crude oil is out of the woods yet. If the U.S. equity markets push down and fill the gaps below I expect crude oil to break the 26.05 low for 2016. If crude oil pushes down into the 18-22 range I believe OPEC will then look to cut crude oil production and crude oil will make an intermediate term bottom.

Early this morning crude oil was trading around the 31.50-31.70 range. At 11:00am crude oil dropped sharply after the EIA Petroleum Status Report was released showing an increase in crude oil inventories of 2.1 million barrels.

Crude oil was down 0.80 (2.55%) today, closing at 30.63.

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Gold

I am currently on the sidelines in gold.

I was looking to buy gold in the 1,135-1,155 range. On February 16th gold traded down to the 1,191.50 level. The gold stocks NEM (Newmont Mining), ABX (Barrick Gold), KGC (Kinross Gold), and AUY (Yamana Gold) were all up big today. I am waiting for gold to get to an oversold condition on the daily charts, hopefully sometime in the next 1-10 business days. I would then be looking to buy gold and the gold stocks ABX (Barrick Gold), NEM (Newmont Mining), GLD (Gold ETF), KGC (Kinross Gold), and AUY (Yamana Gold).

Gold was up 22.30 (1.84%) today, trading up to 1240.60 before closing at 1231.30. Bonds also performed strongly today. This strength in both gold and the bonds is signaling weakness in the economy. Gold is rallying because the market does not believe the Federal Reserve is going to raise interest rates and the bonds are rallying because the economy is slowing.

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