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garry@openinterestanalyst.com

Pace Of SPX Rally To Slow-Crude Remains Firm-USD/JPY Strengthens

SPX:

In our Presidents’ Day report issued on February 15, we expressed our reasoning for the major indices bottoming and said that higher prices were immediately ahead. The Dow Jones Transportation Index was the lead indicator and generated a short-term buy signal on February 12. Three days later on February 18, the S&P 500 along with the S&P 400, Dow Jones Industrial Average and the New York Composite Index generated short-term buy signals. The subsequent performance of the major indices confirmed the expectations outlined in the report. The research notes of February 15, 21, 28, and March 6 are available to all Bloomberg subscribers.

Since then, the SPX rallied from the low of 1810.10 on February 11 to the March 11 high of 2022.37. The Dow Transportation Index advanced from the January 20 low of 6403.31 to its high for the move of 7726.50 made on March 4. In our view, the current market rally is a move to equilibrium after the previous 45 days of intense bearishness beginning in early 2016.

We do not foresee a new bull market immediately on the horizon. To change our mind we need to see a reversal of the key moving average pair we monitor to confirm bull and bear markets: 10 month/20 month moving average crosses.

Currently, the 10 month moving average of SPX of 2015.75 is below the 20 month moving average of 2031.90. The Dow Jones Industrial Average 10 month moving average of 17,112.67 is below the 20 month average 17,361.74. Even the Dow Jones Utility Index has experienced a bearish 10/20 month moving average cross with the 10 month moving average standing at 587.38 against the 20 month average of 589.81. The New York Composite, Russell 2000 and S&P 400 all have experienced bearish 10/20 month moving average crosses. Only the NASDAQ 100 remains in a bullish set up with the 10 month moving average standing at 4419.00 and the 20 month average of 4344.98.

The rally in the S&P 500 E-mini since February 22 has been characterized by total open interest increases on each day’s advance. This is bullish. In the research note published on February 28 and March 6, we highlighted this point and said it confirmed that new buyers were entering the market and short sellers were not capitulating. Total open interest increased again in Friday’s rally, and short-sellers remain steadfast in their belief that lower prices are imminent. We disagree.

The rally in the Dow Transports has just finished its eighth week and week 4 for SPX. In an attempt to determine what is more likely to occur than not, we examined the period encompassing Q4 2014 when the market experienced its last major swoon. SPX made its low of 1821.61 the week of October 13, 2014 and began to rally the week of October 20, 2014 through the week of December 1, or an advance of  seven (7) weeks. If the current equity rally conforms to the pattern of Q4 2014, the rally has 3 weeks to go.

Measuring the weekly low from the first week (October 23, 2014) of the rally (1882.30) to the high of 2079.46 made the week of December 1, SPX gained 197.16 points from low-high. If this is added to the low of 1871.44 made during the first week (February 15) of the current rally, SPX advances to 2068.60.

Last week’s gain of 22.20 points was the smallest weekly advance of the prior three weeks (+51.94, +30.27, +53.00). During the 5th week of the rally (November 17, 2014), SPX gained of 23.68 points and during weeks 6 and 7 added 4.06 and 7.81 points respectively.In summary, the advance should continue, but at a substantially reduced pace. A three-week advance from this point moves the calendar into earnings’ season.

Dollar Index:

We have been unimpressed with the performance of the dollar index for some time and shared this view with readers in the March 6 research note. Last week, the March contract fell to its lowest level since mid February.

From March 6:  “WTI On Buy Signal-AAPL On Buy Signal-Emini Open Interest Increases Positive for Rally.“

“In our view, the dollar index (DXY) and futures look weak. Open interest action has been negative for the most part on rallies and declines. Additionally, trading volumes in dollar index futures have dried up.”

“Nearly one year ago, the dollar index made its first major top of 100.390, and this was taken out by a fraction during the week of November 30, 2015 (100.510). The double top is separated by a period of nearly 9 months and it will take substantial euro weakness for the dollar index to break above it decisively. The 50 day moving average of the DXY is slipping below the 100 day moving average.”

Crude Oil:

From March 6:

“On March 3, April and May WTI crude generated short-term buy signals and both contracts remain on intermediate term sell signals. The April contract closed at $35.92 on Friday, which is the highest close for April since the 35.64 close on January 7. April gasoline did not generate a short-term buy signal last week, but this is likely on Monday. For the week, April WTI advanced 10.59%, April heating oil +10.71%, April gasoline, the laggard of the group gained 2.89%.”

From March 3 when April WTI crude oil generated a short-term buy signal through March 11, the contract has gained 8.74%.  May Brent crude oil has advanced 14.99% since we announced the short-term buy signal on February 26 and this was published on Bloomberg February 28.

The performance of crude oil was outstanding on Wednesday March 10 when the EIA storage report was released and Thursday when SPX pulled back over 20 points from the high after the announcement from the ECB. Both WTI and Brent remained firm throughout the two day period, and though crude needs to correct its over bought condition, especially since WTI generated an intermediate term buy signal on March 10, we think higher prices are ahead. 

The correction should send the May 2016 contract (Friday close $40.00) to our pivot point range of $38.69-39.41 where it should find support. A close below 37.14 would increase the likelihood of a new short-term sell signal. Gasoline generated short and intermediate term buy signals on March 7 and 10 respectively and we said this was likely in the March 6 note.

AAPL:

March 6 note:

“Currently, SPX is overbought relative to its 50 day moving average of 1938.13, and though we do not expect a correction to the 50 day moving average, a pullback to 1950.00 is more than likely before SPX resumes its uptrend. On March 1, we informed clients that Apple generated a short-term buy signal, and if AAPL continues to advance as we expect, a positive tone will be added to the market.”

Ever since Apple generated a short-term buy signal on March 1, the paltry gain has been a disappointment. From March 1 through March 11, Apple has advanced 1.72% versus the SPX of +2.22%. However, it did outperform the NASDAQ 100 in this time frame (+0.65%) and the NASDAQ equal weight index +1.25%. On the negative side, it under performed the technology equal weight ETF RYT +2.52%. Apple’s performance leaves much to be desired and although we do not envision it generating a new sell signal, the stock needs more investor demand to move it north of the past week’s trading range.

USD/JPY:

USD/JPY is likely to generate a short-term buy signal and could occur this week. Last week, EUR/JPY generated a short-term buy signal. Leveraged funds are heavily net long yen per March 11 COT tabulated March 8 (futures only) and this increases selling pressure as the yen weakens.