U.S. Equity Markets Running Into Wall of Resistance on Weekly Charts

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

The U.S. equity markets were getting oversold on the daily charts and I was looking to buy the exchange traded funds which mirror the U.S. equity markets for a trade only if the Dow Jones Industrial Average pulled into the 17,100-17,300 range. The Dow Jones Industrial Average never entered my range and has now pushed up above the 17,700 level following Janet Yellen’s dovish speech yesterday. Once again central bank intervention has been successful in pushing up the U.S. equity markets.

The Dow Jones Industrial Average is in the 17,400-17,900 range where I stated that if I was a long term investor I would be looking to sell any long positions in equities, mutual funds, and/or exchange traded funds. This is not a time to be complacent. Last week it was reported that over three billion dollars had been taken out of mutual funds and many investors were starting to utilize exchange traded funds. Investing with exchange traded funds allows one to enter and exit the markets as they wish, taking advantage of moves on both the upside and downside. In addition one pays minimal execution fees compared to the 2-5% management fees charged by a mutual fund or wealth manager.

The U.S. equity markets are now extremely overbought on the daily and weekly charts. I got a buy signal on the weekly chart for the exchange traded fund SPY when it closed at 202.76 on March 11th. Since I got that buy signal the Dow Jones Industrial Average has rallied almost 600 points. Going forward I anticipate a series of pullbacks in the U.S. equity markets over the next 5-8 weeks. I expect this upward momentum to be exhausted by the end of May and we will see a repeat of 2015 with significantly lower prices coming in the summer. If the Dow Jones Industrial Average pushes up into the 17,900-18,500 range I would potentially be looking to short the U.S. equity markets using exchange traded funds. With this morning’s gap up opening, there are now four gaps below on the daily chart for SPY. These gaps go down to the 182.86 level, equivalent to approximately the 15,500 level on the Dow Jones Industrial Average. I expect these gaps below to be filled on the move down I anticipate this summer. Once these gaps are filled I believe the U.S. equity markets could possibly push down to new lows for 2016.

This rally has not been based on economic growth or strong corporate earnings. Economies are slowing worldwide. The European economy is almost in a deflationary environment, and the Japanese economy has been fighting off deflation for over a decade. In addition the U.S. economy is not growing with GDP below 1.25%. The U.S. equity markets have rallied because of central bank intervention and short covering. The Bank of Japan adopted negative interest rates and the European Central Bank (ECB) enacted additional quantitative easing measures. At the March meeting the Federal Open Market Committee (FOMC) announced that they are now only forecasting 2 rate hikes in 2016 after forecasting 4 rate hikes at the December 2015 meeting. I do not expect the FOMC to raise the federal funds rate before the November U.S. presidential election. Yesterday Janet Yellen talked up the U.S. equity markets with dovish language. Although the U.S. equity markets have rallied the U.S. economy is still weak. This underlying weakness in the economy will eventually catch up to the U.S. equity markets.

After the December 2015 meeting when the federal funds rate was raised to 0.25% the FOMC stated that they had confidence in the U.S. economy and were forecasting four rate hikes in 2016 with a target of 3.25-3.50% by 2018. This was a very aggressive forecast and I did not see it coming to fruition. At the December 2015 meeting the FOMC also stated that they expected their 2% inflation target to be met in 2016. I respectfully disagreed and did not expect their inflation target to be met. Yesterday Federal Reserve Chair Janet Yellen gave a speech at the Economic Club of New York. She was concerned by some of the low inflation readings and stated that inflation is likely to remain below the Federal Reserve’s 2% target in 2016. She stated that the Federal Reserve could potentially enact additional stimulus if needed. In addition she said that the global economic situation influenced the decision to decrease the amount of rate hikes forecast for 2016 and that another price drop in crude oil could hurt global economies.

The Dow Jones Industrial Average closed up 83.55 (0.47%) at 17,716.66, the NASDAQ Composite closed up 22.67 (0.47%) at 4,869.29, the S&P 500 closed up 8.94 (0.44%) at 2,063.95, and the Russell 2000 closed up 1.36 (0.12%) at 1,110.44.

Long Term Signals:

AIG (American International Group): Buy Signal on Daily Chart (03/21/16)
Entries: 52.16, 51.39
Stop: 50.32
Status: No Fills

TCK (Teck Resources Limited): Sell Signal on Daily Chart (03/24/16)
Entries: 7.66 (filled), 7.80 (filled), 8.34
Stop: 8.79
Status: Covered 2 at average price of 7.83 (+0.00 per entry)

UNP (Union Pacific Corporation): Sell Signal on Daily Chart (03/29/16)
Entries: 80.75 (filled), 81.56, 82.89
Stop: 84.77
Status: Covered at 80.36 (+0.39)

WIN (Windstream Holdings, Inc.): Sell Signal on Daily Chart (03/29/16)
Entries: 7.70 (filled), 7.98
Stop: 8.31
Status: Covered at 7.46 (+0.24)

APOL (Apollo Education Group, Inc.): Sell Signal on Daily Chart (03/29/16)
Entries: 8.17 (filled), 8.30, 8.54
Stop: 8.88
Status: Covered at 8.16 (+0.01)

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Crude Oil

I am currently on the sidelines in crude oil.

Crude oil pushed up following the slightly bullish crude oil inventory number but was met by heavy selling. Fundamentally nothing has changed 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. There are talks of a meeting to discuss a production freeze; however with current production levels a freeze would not do much and there are no talks of a production cut.

If crude oil closes below the 36.15 level on a daily basis, I will get a sell signal in crude oil on the daily charts and I would expect crude oil to head a lot lower.

Crude oil was down 0.19 (0.49%) today, closing at 38.30.

Follow Steve on Twitter at @stevekalayjian

Gold

I am currently on the sidelines in gold.

I have been very bullish gold since I got a buy signal on the weekly chart with the close above the 1,131.30 level on February 5th. There is a beautiful pattern setting up on the weekly chart in gold. I am waiting for March’s employment situation to be released this Friday, April 1st before I would be looking to enter the gold market.

Gold was down 17.60 (1.42%) today, closing at 1226.60.

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