Waiting for U.S. Equity Markets to Get to an Oversold Condition on Daily Charts

U.S. Equity Markets

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

The U.S. equity markets are getting significantly overbought on both 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. From the time of that buy signal the Dow Jones Industrial rallied about 600 points to a high of 17811.48 on April 1st. It is unlikely that I will get a sell signal on the weekly chart for SPY only 3-4 weeks after getting the buy signal. I am looking for the U.S. equity markets to work off the significant overbought condition and get to an oversold condition on the daily charts in anticipation of another push back up. At this oversold condition I would be looking to buy the exchange traded funds which mirror the U.S. equity markets for a trade only. The exchange traded funds which mirror the U.S. equity markets include DIA (Dow Jones Industrial Average), QQQ (NASDAQ Composite), SPY (S&P 500), and IWM (Russell 2000). I expect to see backing and filling in the U.S. equity markets with the Dow Jones Industrial Average reaching a top in the April-May time period and declines coming during the summer.

I do not expect the Dow Jones Industrial Average to make new 52 week highs above the 18,350 level. We have now seen two consecutive quarters of declining corporate earnings. Overall the U.S. economy is still sluggish and both Europe and Japan are fighting off a deflationary environment. I expect the Dow Jones Industrial Average to run into significant overhead resistance in the 17,800-18,300 range. 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. I would be looking to be on the sidelines, 100% in cash. This is a great opportunity to be exiting any long positions as there is significant risk below. There are currently 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 get filled by late summer. Once these gaps are filled I believe the U.S. equity markets could possibly push down to new lows for 2016.

After trading down to a 2016 low of 14.78 on February 11th DB (Deutsche Bank) rallied up to a high of 20.70 on March 14th. I had stated that I thought DB was a short. Today DB was down 0.81 (4.84%), closing below the 16.00 level at 15.93. Many were fearful of DB with their exposure in credit default swaps. I do not think that Germany will let Deutsche Bank go under, but I believe there could be some underlying problems and I will be monitoring the situation over the upcoming months.

When the Bank of Japan cut their interest rates into negative territory they expected a devaluation of the Yen, resulting in more attractive Japanese exports. Despite their expectations this backfired and the yen skyrocketed. The USDJPY is now trading around the 110 level. This is another example of why these quantitative easing programs are being deemed quantitative failure.

In December of 2015 when the FOMC decided to raise the federal funds rate by 0.25% it was almost as if they were just trying to show that they had confidence in the U.S. economy. They expected their 2% inflation target to be met sometime in 2016 and forecast 4 hikes in the federal funds rate in 2016. I did not see what the FOMC was seeing. They should have been raising the federal funds rate early in the cycle. The unemployment rate was at 5.1% when the FOMC decided to raise the federal funds rate in December of 2015. A few years ago when unemployment was at 8.5%, the FOMC maintained that they would start raising the federal funds rate once unemployment got down to 6.5%. If they had done so the federal funds rate would now be at 1-1.25%, providing the FOMC the option to cut the federal funds rate. I do not expect the FOMC to choose to raise the federal funds rate any time before the U.S. presidential election in November. At 2:00pm tomorrow the minutes from the March FOMC meeting will be released.

The Dow Jones Industrial Average closed down 133.68 (0.75%) at 17,603.32, the NASDAQ Composite closed down 47.86 (0.98%) at 4,843.93, the S&P 500 closed down 20.96 (1.01%) at 2,045.17, and the Russell 2000 closed down 12.69 (1.14%) at 1,095.85.

Kalayjian Signals:

MDRX (Allscripts Healthcare Solutions, Inc.): Buy Signal on Daily Chart (04/01/16)
Entries: 12.95, 12.68, 12.40
Stop: 12.06
Status: No Fills

P (Pandora Media, Inc.): Sell Signal on Daily Chart (04/01/16)
Entries: 9.39, 9.84, 10.29
Stop: 10.92
Status: No Fills

USO (United States Oil ETF): Sell Signal on Daily Chart (04/04/16)
Entries: 9.61, 9.89, 10.17
Stop: 10.57
Status: No Fills

BBRY (BlackBerry Limited): Sell Signal on Daily Chart (04/04/16)
Entries: 7.68, 7.87, 8.06
Stop: 8.34
Status: No Fills

JCP (J. C. Penney Company, Inc.): Sell Signal on Daily Chart (04/04/16)
Entries: 10.90, 11.15, 11.41
Stop: 11.77
Status: No Fills

BMY (Bristol-Myers Squibb Company): Buy Signal on Daily Chart (04/05/16)
Entries: 65.00, 64.04, 63.08
Stop: 61.73
Status: No Fills

BRCD (Brocade Communications Systems, Inc.): Sell Signal on Daily Chart (04/05/16)
Entries: 9.58 (filled), 9.76
Stop: 10.04
Status: Short at 9.58

Follow Steve on Twitter at @stevekalayjian

Crude Oil

I am currently on the sidelines in crude oil.

I now have a sell signal on the daily chart for crude oil to mirror the sell signal on the weekly chart. I am looking for a bounce in crude oil to an overbought condition on the daily charts where I would look to get short.

Crude oil traded down to a low of 35.24 today before rallying towards the end of the day. At 4:30pm the American Petroleum Institute (API) report showed a decrease in crude oil inventories by 4.3 million barrels from the prior week. Crude oil inventories were expected to increase by 3.2 million barrels. Crude oil pushed up another 50 cents after the release of this report.

Fundamentally nothing has changed for crude oil. Iran has 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. It was reported that Saudi Arabia will not participate in a production freeze if Iran refuses to do so. 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.

Crude oil was up 1.10 (3.10%) today, closing at 36.56.

Follow Steve on Twitter at @stevekalayjian

Gold

There is a beautiful pattern setting up on the weekly chart for gold. If gold pulls into the 1,175-1,200 range I would be looking to buy gold with a 1,160 stop. I would also be looking to buy the gold stocks if gold enters this range. The gold stocks I am looking at include ABX (Barrick Gold), AUY (Yamana Gold), GDX (Gold Miners ETF), GG (Goldcorp), KGC (Kinross Gold), NEM (Newmont Mining) and SLV (Silver ETF).

Gold was up 15.90 (1.31%) today, closing at 1232.90.

Follow Steve on Twitter at @stevekalayjian

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Copyright 2016 KnowVera Research

Thank you,

Stephen Kalayjian
@stevekalayjian

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