Significant Oversold Condition Fueled by Federal Reserve Official’s Comments Pushes U.S. Equity Markets Higher

U.S. Equity Markets

This morning at around 10:00am when the Dow Jones Industrial Average was down around 80 points the S&P 500 futures front month contract had traded down to 1871. I looked at the daily chart for the S&P 500 futures and the 10-bar weighted moving average was at 1978. That is a difference of 107 handles from the 10-bar weighted moving average on the daily chart for the S&P 500 futures and typically a difference greater than 50 handles signals a significant overbought or oversold condition. From that low the S&P 500 futures exploded 40-45 handles to the upside. Although by definition we are not in a bear market, in a bear market one sees explosive bear market rallies of this magnitude. It seems as if we are in a bear market with the way the U.S. equity markets are trading. By definition a bear market is when the market is down 20%.

Today I heard someone talking about how GoPro (GPRO) was down 33% for the year. If you look at where the market is and how much it has declined one of the things I stress is that I firmly believe in technical analysis. I do not really believe in fundamental analysis. One major firm had previously had a significant buy rating on GoPro (GPRO) and then threw the towel in today when the stock traded in the mid-12 range. To me mathematics is the key to trading and technical analysis work. I base my market calls on technical analysis.

At 10:30 I got a buy signal in the U.S. equity markets. At one point today the Dow Jones Industrial Average was up over 300 points and then at the end of the day a massive sell program came in. The S&P 500 futures dropped 15-17 handles in about 20 minutes and the Dow Jones Industrial Average closed up 227 points.

I am still looking for a pushup in the U.S. equity markets to work off the oversold condition on the daily charts and provide a good opportunity where I would look to get short. On Friday when the S&P futures closed below 1956 I got a sell signal on the weekly charts. On my weekly charts the trend algorithm will not go from negative to positive in only one week. I am looking to short the U.S. equity markets and I will provide parameters once we get near the levels at which I would look to get short. This level for the S&P futures would probably be in the 1960-1980 range. I am not sure if they will push up that high. Twice the S&P futures were unable to get through the 1940 level.

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Federal Reserve Official Addresses Declining Oil Prices and Low Inflation Expectations

In October the Federal Reserve stated that they were data dependent when considering raising interest rates and that they were concerned about the economic situation in China. Following the December meeting the Federal Reserve stated that they had confidence that the U.S. economy would grow and that their inflation target of 2% would be met. They did not mention crude oil or the deflationary pressures crude oil is bringing to the economy. Crude oil prices have dropped about 70% from the 100 dollar a barrel level down to the 30 dollar a barrel level and is down 17% this year alone.

Today a top Federal Reserve official said “Once oil prices stabilize, headline inflation should return to the Federal Open Market Committee’s inflation target of 2 percent, although it may take longer than previously thought.” He also said U.S. inflation expectations are falling, and that is worrisome. “Low inflation expectations may keep actual inflation lower, all else equal, making it more difficult for the Fed to return inflation to target.” This caused the Dow Jones Industrial Average to rally because traders realized that if the Federal Reserve is not going to meet their inflation target as soon as anticipated the likelihood of further interest rate hikes is decreased.

A few years ago the Federal Reserve stated that they would look to start raising interest rates when unemployment got down below 6.5%. At the time when the unemployment rate got below that level it may have made sense to raise interest rates. After seven years of 0% interest rates, a 5% unemployment rate, and seeing economies across the globe slowing, I believe the Federal Reserve acted late. I stated that I do not expect the Federal Reserve to raise interest rates in the first meeting of 2016. After the comments by the Federal Reserve official today I do not believe the Federal Reserve will raise interest rates in the first quarter of 2016. I believe the Federal Reserve will do everything it can to calm the markets down and get them to lift up.

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Gold

I stated that I am on the sidelines in gold. I stated that the recent gold trades were based off of a tradable pattern only as I still have a sell signal on gold on the weekly chart. Gold traded down to the 1071 level today and I am very close to getting a sell signal on the daily chart in gold to mirror the sell signal on the weekly chart.

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Crude Oil

Today crude oil had a bounce which I believe will be short lived. Crude oil is starting to show signs of a short term bottom in the 28-30.5 range but I am not looking to buy crude oil. I would rather be looking to short crude oil than be looking to buy crude oil.

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