SPX Rally Near The End-Possible Reversal Of The Crude Oil Sell Signal

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garry@openinterestanalyst.com

In our research note of March 13, we provided our calculation for determining the target price for the S&P 500 during the following three weeks and are supplying an extract for the reader’s convenience. Using data from the fourth quarter 2014 as our frame of reference, OIA projected the target price for the SPX at 2068.60 and said the advance was likely to be of three weeks duration. On April 1, SPX topped at 2075.07.

From March 13:

“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.”

“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.”

Although, SPX continues to be on short and intermediate term buy signals, it is getting close to generating a short-term sell signal. The Dow Jones Transportation Index generated a short-term sell signal on April 7 after topping on March 21, several days prior to the SPX high. In our research note of February 15, we called the beginning of the SPX rally when OIA announced the transportation index registered a buy signal on February 12.

The transport index may be the proverbial canary in the coal mine in the current environment just as it was in February when the buy signal occurred. The notes from February 15 along with those of February 21, 28, March 6, March 13 and April 3 are available to all Bloomberg subscribers.

On April 5, the June Nikkei 225 futures contract generated a short-term sell signal and despite the rally from the February 12 low, it never generated an intermediate term buy signal. Unless there is Japanese central bank intervention, it appears likely the June contract will test the 14,815, the low made on February 12. On April 7 the June contract made a new low for the move of 15,375.

Since 2016 is an election year, we examined the second-quarter performance for SPX during the years 2000, 2004, 2008 and 2012. We found in three of the four election years, SPX topped in the first several days of April during the second quarter.

For example, during the second quarter of 2012, the high of 1422.38 was made on April 2. The high in Q2 2004 occurred on April 5 (1150.57) and during 2000, the quarterly high was made on April 10 (1527.11). The exception to the three years cited occurred during 2008, an anomalous year if there ever was one when the Q2 high was made on May 19 (1440.24).

Performance for the second quarter also had one exception: Q2 2004 when SPX gained 1.29%. While during 2000, 2008 and 2012, SPX declined by 2.93%, 3.23%, 3.29% respectively during Q2.

SPX remains in a bearish moving average set up with the 50 day standing at 1974.90-100 day 1993.70-200 day 2014.43. For the rally to continue, it must make a daily low above OIA’s pivot point of 2049.28. During the current rally, this has occurred on three occasions: March 30, 31 and April 4. If SPX is unable to make a low above the pivot point, it will trade sideways to lower.

WTI Crude:

In the research note of April 3, we stated that May WTI would likely generate a short-term sell signal and this occurred on April 4 though May WTI remains on an intermediate term buy signal. Typically, after the generation of sell signals, markets tend to have a counter trend rally (according to our protocols) and this began on April 5. The May contract continued its rally on April 6 ($1.85) and April 8 (2.46).

Total open interest increased on April 5 and April 6 and preliminary stats for April 8 indicate that open interest increased again. Open interest increases on price advances confirm that new buying is powering the market higher, a bullish indicator. However, preliminary stats are unreliable and we only use final data because of substantial changes between the two versions.

The strength of the move on April 8  for WTI and products surprised us and it occurred on record high volume for WTI.  Gasoline had a strong move on Friday (+8.25 cents-heating oil +7.47 cents), and gasoline has been the laggard recently even as the summer driving season approaches. Both gasoline and heating oil generated short term sell signals last week, but they remain on intermediate term buy signals.

Last week’s strong action may portend a reversal of the short term sell signal. The first indication would be the degree of a follow-through rally beginning with tonight’s session. Most important: May and June contracts must make daily lows above our key pivot points.