From the desk of Tom Bruni @BruniCharting
In late December I highlighted a few things from a weekend of charting that suggested improving risk appetite in Equities, one of which was a potential bottom in Crude Oil. Today I’m seeing the opposite, so I want to look at the near-term risk Crude Oil poses along with a few other things.
The main chart in this post, Crude Oil, is currently consolidating above our mean reversion price target of 55.25, but remains below a downward-sloping 200-day moving average with momentum in a bearish range.
A break back below support would confirm a failed breakout and the continuation of the primary trend which is lower. Given the positive correlation between Crude and stocks since October, that would likely be a headwind for the overall market.
Click on chart to enlarge view.
Another thing that complicates the current environment is the bond market, which recently confirmed a failed breakout and bearish momentum divergence. I highlighted this possibility a few weeks ago and suggested that if this confirmed then a more choppy, rangebound environment for rates could be expected. I’m still in that camp today.
Additionally, some of the most important markets in the world, like the German DAX, are nearing their mean reversion targets. While they may be able to squeeze out a bit more upside, they’re still below key support and a downward-sloping 200-day moving average with momentum in a bearish range. If sellers are going to step in, it’s likely going to be at current levels.
Even Emerging Markets which led us off the lows in Q4 are facing some headwinds. Prices are struggling to stay above the 38.2% retracement of their 2018 decline and momentum is making a lower high after not getting overbought during the recent rally. Again, if sellers are going to step in, here would be a logical level.
Taiwan is another important market that’s struggling to get back above its 2015 highs. As an overseas proxy for Semiconductors, bulls want to see this break higher, not lower from here.
Frontier Markets are breaking below the uptrend line from their December lows and momentum never got overbought. Again, if sellers are going to emerge and take this lower it’ll likely be from here.
Last but not least is the FTSE All-World Ex-US Index, which is at an inflection point. It’s broken a key downtrend line, but remains below resistance near 50.25, momentum is in a bearish range, and now we patiently wait to see whether this mini-consolidation breaks higher or lower.
I still don’t see any reasons to be aggressively short over the intermediate or long-term, but I am seeing some risks that could put a damper on risk appetite in the short-term. Whether these developments work themselves out through time or price remains the question, but I think it’s clear that it’s tough to be a buyer of Equities at the index level right now.
There are still plenty of long opportunities in individual names, but you probably noticed that Thursday I wrote a piece for Premium Members outlining our first Equity shorts in months. Shippers are some of the worst stocks on the planet, so if those setups don’t work then that’s likely a signal to us that we should not be shorting stocks in this environment.
In the meantime I’m currently looking at names in sectors/sub-sectors showing relative weakness like Energy, Airlines, Materials, Coal, Casinos & Gaming and a few others to potentially short on an absolute and/or relative basis should more cracks in this market begin to emerge.
Thanks for reading and let us know if you have any questions!