Three Day Rally Creates Three Gaps Below Market For Potential Retesting of Lows in the Weeks to Come

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

I am looking for the U.S. equity markets to get to an extreme oversold or an extreme overbought condition. At an extreme oversold condition I would be looking to buy the exchange traded funds which mirror the U.S. equity markets and at an extreme overbought condition 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 now have three huge gaps on the exchange traded fund SPY down to the 182.67 level, 10 points below today’s close. This is a sign that the U.S. equity markets will get back down to those levels sometime in the next month or two. These gaps will get filled. If the U.S. equity markets get to an extreme overbought condition I will be looking to take advantage of these gaps by shorting the exchange traded funds which mirror the U.S. equity markets.

On January 8th I got a sell signal on the weekly charts for the U.S. equity markets when the S&P 500 futures closed below the 1956 level on the weekly chart. If the S&P 500 futures close above the 2008 level on the weekly chart I will then get a buy signal for the U.S. equity markets on the weekly charts. I do not see this happening. There is a significant amount of overhead resistance and I do not expect the Dow Jones Industrial Average to get above the 16,700-16,800 range. If the Dow Jones Industrial Average does get up into this range I would be looking to short the exchange traded funds which mirror the U.S. equity markets.

We have been seeing extreme rallies in the U.S. equity markets. On January 20th the S&P 500 futures traded down to a low of 1,804.25 and were 142 points below the 10-bar moving average on the daily chart, an extreme oversold condition. From that extreme oversold condition the S&P futures rallied over 130 handles and the Dow Jones Industrial Average rallied over 1,200 points in only a week and a half. In the last three days we have seen the Dow Jones Industrial Average rally almost 800 points. From the February 11th low on the S&P 500 futures of 1802.50 the S&P 500 futures have rallied about 125 handles and the Dow Jones Industrial Average has rallied almost 1000 points. This significant rally has been fueled by talks that the European Central Bank (ECB) will potentially look to enact additional quantitative easing in March. In addition the Bank of Japan recently cut interest rates to negative territory and is now waiting to see the effects the negative rates have. This does not mean that they won’t decide to enact additional quantitative easing or that they will not cut interest rates deeper into negative territory.

We saw another explosive rally today in the U.S. equity markets. The Dow Jones Industrial Average closed up 257.42 (1.59%) at 16,453.83, the NASDAQ Composite closed up 98.11 (2.21%) at 4,534.06, the S&P 500 closed up 31.24 (1.65%) at 1,926.82, and the Russell-2000 closed up 15.33 (1.54%) at 1,011.13.

Follow Steve on Twitter at @stevekalayjian

January FOMC Minutes

Today at 2:00pm the minutes from the Federal Open Markets Committee’s (FOMC) January meeting were released. Some of the Federal Reserve officials saw uncertainty in the inflation outlook. With the way crude oil and other commodity prices were acting I did not see how the Federal Reserve thought it was very likely that their inflation target of 2% would be met in 2016. Inflation is currently nowhere near their 2% target. The Federal Reserve officials thought it was unlikely that the U.S. dollar and crude oil would hold down inflation for long.

Most of the Federal Reserve officials saw solid growth in the job market while several saw moderate growth. The problem is that the jobs being created right now are not high paying jobs. This is not a good sign for the economy.

Some of the Federal Reserve officials were concerned of the effect the Chinese economy was having on the U.S. economy. We are seeing a slowdown in the Chinese economy and I do believe it will have a negative impact on the U.S. economy. I am not calling for a recession in 2016. By definition a recession is “generally identified by a fall in GDP in two successive quarters.” Fourth quarter GDP for 2016 came in at a mere 0.7%.

The Federal Reserve officials stressed that the timing of hikes would be data dependent. The Federal Reserve has been saying they were data dependent for months and months. When the Federal Reserve raised interest rates in December it was not warranted as the economic data including pending home sales, new home sales, retail sales, and GDP did not point to significant growth in the U.S. economy. The Federal Reserve officials expect moderate growth in 2016.

There was no mention of negative interest rates in the minutes from the January meeting. There are currently 489 million people living in countries with official negative rate policies (Eurozone, Denmark, Sweden, Switzerland, and Japan).

The minutes are telling me that the Federal Reserve does not know what to do. They spent 4.5 trillion dollars on quantitative easing programs over the last eight years and the U.S. economy really has not grown. I believe going to negative rates would have a significant negative impact on the U.S. economy. When the Bank of Japan announced they would be going to negative interest rates the Nikkei dropped well over 1000 points in only two days. No one wants to be taxed on their saving. Imagine being punished for saving your money. If the Federal Reserve cut to negative rates I believe we would see people running to the banks to pull out their money. I would be the first one to run to the banks, pull money out, and stash it somewhere. As people pull their money and the bank’s reserves dwindle the banks will no longer be able to lend money. The U.S. economy will come to a complete standstill. Negative interest rates are still an experiment and the U.S. has never gone to negative rates. Even the talk of negative interest rates is extremely alarming.

Follow Steve on Twitter at @stevekalayjian

Crude Oil

I am currently on the sidelines in crude oil.

I am looking for a significant selloff in crude oil before I would be looking buy. I do not expect a cut in crude oil production until prices fall into the high teens to low 20s range. Currently OPEC is only talking of freezing crude oil production and there is still a significant oversupply and overproduction of crude oil. I do not expect to see a short term bottom in crude oil until we hear the word “cut”.

Crude oil has been in the 26-32 range. At one point today crude oil was up with the talks that Iran would possibly cooperate with OPEC on a freeze of crude oil production. Iran stated that they would not cooperate with a freeze on crude oil production as they were still below their pre-sanctions production level. At 4:30pm the American Petroleum Institute (API) report showed a decrease in crude oil inventories by 3.3 million barrels and crude oil shot up above the 31.30 level.

Crude oil was up 2.31 (7.93%) today, closing at 31.43.

Follow Steve on Twitter at @stevekalayjian

Gold

I am currently on the sidelines in gold.

I am looking for gold to pull back and get to a significant oversold condition on the daily chart where I would 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). I am hoping gold gets to this oversold condition sometime between now and early next week.

I am very bullish here on gold. I do not think we are out of the woods yet and that there is an economic slowdown coming. I do not expect the Federal Reserve to raise rates in their March meeting. When interest rates are raised gold prices decrease. According to the CME FedWatch tool there is currently only a 6% chance of a rate hike in the March meeting.

Gold was up 8.10 (0.67%) today, closing at 1209.00.

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