SFO Magazine: Talking Fibonacci for the S&P500 and Crude Oil's Bullish Divergence
Happy Thanksgiving everyone. I was traveling all over Texas for work last week and then to upstate NY for the weekend to visit family. So in case you missed it, here is my post in full for SFO Magazine Friday Morning:
Expect Bounce After Long Stretch of Losses
Friday, November 25, 2011
By J.C. Parets
After six consecutive days of losses, it appears the market is attempting a bounce that is long overdue. All of the major sectors of the market are experiencing pretty extreme oversold conditions, and this sets the stage for a face-ripping rally. The question historically is not, if the quick bounce will occur, but from what level it will start?
USING FIBONACCI
This is where Fibonacci retracements help us out. On Wednesday before the holiday, the S&P500 closed right at the 61.8% Fibonacci retracement near 1160. This is typically the final line in the sand.
When markets are correcting and not attempting a major move lower, support is typically found at the 38.2%, 50%, and 61.8% retracements of the previous up move. In this case, we are talking about the major October rally that took the S&P500 up 20% in less than a month. The first two levels of interest held briefly but ultimately broke down after a day or so.
If the 61.8% retracement around 1160 were to have been breached, then a test of the early October lows would be inevitable. I have been in the camp that this is just a correction and not the start of something new, but my fortitude certainly has been tested this week. Right now it feels very hard, if not impossible, to get long stocks. Usually that is a good sign.
CRUDE OIL
One very positive sign for the stock market has been the resilience in crude oil. During the October stock market rally, crude oil bottomed out at a higher low than it did in August and managed to rally 35% into November.
With the stock market correcting over the last few weeks, oil has managed to hold on to most of those gains, down just about 6% off its $103+ highs.
Crude oil and the stock market have seen a very positive correlation since spring but just recently this bullish divergence in crude oil is hard to ignore. There is something happening here: Is it the stock market telling us that crude oil investors are too optimistic? Or are the recent buoyancy characteristics seen in crude oil telling us that the selling in stocks is too extreme? I believe we’ll know the answer very soon.
NEXT MOVE
For now, I would like to reiterate that a face-ripping rally is long overdue - six down days in a row in a light trading week.
Next week, we could see the start of something massive. When you see the market turn, with volume coming in heavy, the higher beta names are going to outperform their larger-cap counterparts and those who miss it are going to wish they didn’t.
If you don’t have the experience of trading these types of moves, your best bet may be to stay out and just watch from the sidelines. But there will be a lot of money made in a very short amount of time. When the tide turns, buy your favorite names and put stop losses below their recent lows. Look for the best risk/reward setups out there. Opportunities like this a few and far between, but when they come they could make your month (or year).
Tags: $CL_F $USO $SPY $SPX $ES_F