U.S. Equity Markets Extremely Overbought on Both Daily and Weekly Charts

If the Dow Jones Industrial Average pushes up into the 17,400-17,900 range I would be looking to take profits and sell any long positions in equities, mutual funds, and/or exchange traded funds. If the U.S. equity markets continue straight up through this range to a significant overbought condition where the S&P 500 futures are over 100 points above the 10-bar moving average on the daily chart I will be providing a range for a trade only where I would be looking to:

1. Buy the exchange traded funds which move in the opposite direction of the U.S. equity markets. These exchange traded funds include DOG (Dow Jones Industrial Average), PSQ (NASDAQ Composite), SH (S&P 500), and RWM (Russell 2000).
2. Short the exchange traded funds which mirror the U.S. equity markets. These exchange traded funds include DIA (Dow Jones Industrial Average), QQQ (NASDAQ Composite), SPY (S&P 500), and IWM (Russell 2000).

I have stated that I expect significant volatility in 2016 and that the motto for the U.S. equity markets this year is to trade the aberrations. The U.S. equity markets are extremely overbought on both the daily and weekly charts. There is a staggering amount of overhead resistance on the weekly chart for the Dow Jones Industrial average in the 17,400-18,300 range. There is a gap above on the weekly chart for SPY up to the 203.87 level. I expect this gap to be filled before the U.S. equity markets head back down. With Friday’s close I now have a buy signal on the weekly chart for SPY. I expect to see pullbacks to a series of higher lows in the upcoming weeks. I expect this buy signal to last 6-10 weeks before lower prices come in the late spring-early summer.

I expect this decline to come at around the same time of year as the decline we saw in the summer of 2015. In April-May of 2015 I called the market top when I stated that if the Dow Jones Industrial Average got into the 18,100-18,400 range I would be looking to sell any long positions and establish short positions. The Dow Jones Industrial Average got up to the 18,300 level and I then stated I was looking for a move down to the 16,100 range sometime in the summer of 2015 and the Dow Jones Industrial Average traded down to 15,371. I expect a similar scenario to occur in 2016 and I will be looking for a buying opportunity sometime this summer for a rally to carry into the end of the year.

The equity markets worldwide are rallying because of central bank intervention. There is weakness in economies worldwide. The equity markets should rally based on strong economic growth and corporate earnings. If the economies were strong there would be no need for all of the central bank intervention. In my opinion these quantitative easing programs have been a failure. The situation is setting up like a house of cards and it is just a matter of time before it ends ugly.

On Wednesday, March 16th at 2:00pm the Federal Open Market Committee (FOMC) will announce whether they decided to raise the federal funds rate at their March meeting. According to the CME FedWatch tool there is currently a 0% chance of a rate hike at this meeting. I also believe that there is no chance that the FOMC decides to raise the federal funds rate at this meeting and I expect them to say that they are data dependent when considering rate hikes. Just last week the European Central Bank (ECB) decided to extend their quantitative easing program past the March 2017 deadline, increase their bond purchasing program from 60 billion euros to 80 billion euros, and cut their interest rates further. There is no way the FOMC will pretend that the U.S. economy is strong and raise interest rates, especially after the additional quantitative easing by the ECB. U.S. fourth-quarter GDP was last reported at a mere 1.0%. At 8:30am tomorrow retail sales will be released and the expectation is that the numbers will be weak.

The Dow Jones Industrial Average closed up 15.82 (0.09%) at 17,229.13, the NASDAQ Composite closed up 1.81 (0.04%) at 4,750.28, the S&P 500 closed down 2.55 (0.13%) at 2,019.64, and the Russell 2000 closed down 3.31 (0.30%) at 1,084.25.

Long Term Signals:

FTR (Frontier Communications): Sell Signal on Daily Chart (03/10/16)
Entries: 5.30 (filled), 5.43, 5.58
Stop: 5.76
Status: Short at 5.30

GRPN (Groupon): Sell Signal on Daily Chart (03/10/16)
Entries: 4.27, 4.43, 4.59
Stop: 4.81
Status: No Fills

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Crude Oil

I am currently on the sidelines in crude oil.

I stated that crude oil is starting to run into a brick wall in the 38.30-38.90 range. Today crude oil traded up to a high of 38.77 before selling off sharply to a low of 36.68 and settling above the 37 level towards the end of the day. Yesterday Iran stated that they plan to boost their crude oil output to 4 million barrels daily before they will even consider participating in a possible production freeze or cut. Today it was reported that shale producers will be pumping out 9 million barrels of crude oil daily. Crude oil inventories are at a record high (over one billion barrels worldwide) and are increasing further with production continuing to outpace demand. When the U.S. equity markets start to break I do believe we will see crude oil head back down. I believe there is an 85-90% chance that crude oil will make a new low in 2016. On February 11th crude oil traded down to the 2016 low of 26.05. If crude oil makes a new low I believe it could push down into the low 20 range and possibly even break the 20 level. If this happens I believe there is a very strong chance that OPEC will look to cut production by 5-10%.

Crude oil was down 1.13 (2.94%) today, closing at 37.37.

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Gold

I am currently on the sidelines in gold.

I stated that I would be looking to buy gold and the gold stocks if gold made a higher low in the 1,195-1,215 range. I am no longer looking to buy gold and the gold stocks in this range. I am now waiting to see what the Federal Reserve Open Market Committee (FOMC) says in their announcement on Wednesday. If the FOMC were to say that they are looking to raise the federal funds rate three times this year then gold would sell off sharply. I do not think they are going to say this but I am waiting to see what they say. It is possible that gold sells off again tomorrow going into the meeting. People are thinking that the FOMC will raise the federal funds rate sometime after the presidential election; however that is a long time away and I expect many opportunities to trade gold on the long side before then.

Gold was down 23.40 (1.86%) today, closing at 1236.00.

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