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WTI On Buy Signal-AAPL On Buy Signal- Emini Open Interest Increases Positive For Rally

In last week’s research note published on February 28 (Dollar Index Near Buy Signal-S&P 500 Sideways To Higher-Firmer Oil Supports), we stated the S&P 500 was likely to move higher and that firmer oil prices would aid the rally. Also stated was that the dollar index was close to a short-term buy signal. Research notes from February 15, 21 and 28 can be accessed from your terminal. 

On February 29. The March and June dollar index generated short-term sell signals on February 29 and remain on  intermediate term sell signals. The March and June euro generated short-term sell signals on February 29 and intermediate term sell signals on March 1.

The signals of last week in the dollar index and euro could reverse with the upcoming announcement by Mr. Draghi of the ECB. 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 And Products:

In the February 28 research note, we informed Bloomberg subscribers that Brent crude oil generated a short-term buy signal on February 26. We expected a pullback of 1-3 days, and this did not occur. Instead, and much to our surprise, Brent traded firmly through the week. It did recover later in week as we suggested in the February 28 note and rallied on Friday along with WTI. For the week, May Brent advanced 10.75%. 

February 28 research note on Brent:

“On February 26, the May Brent crude oil contract generated a short-term buy signal, which is the first short term buy signal in Brent since October 7, 2015. On October 21 Brent crude reversed the buy signal by generating a short-term sell signal and has remained on this status until Friday.”

“Usually, after the generation of a short-term buy signal, markets have a tendency to pullback from 1-3 days before resuming the uptrend. Certainly, Brent can immediately reverse Friday’s buy signal, but as we pointed out in the February 21 note regarding the buy signal in the S&P 500, this tends to be a rare event. In summary, we expect somewhat weaker prices early this week, but a recovery later on.”

February 28 Research note on WTI:

“Most notably, WTI has been unable to generate a short-term buy signal and this is due to the substantial under performance of WTI versus Brent.” “If  gasoline generates a short term buy signal, firmer product prices should support WTI and a short-term buy signal should be generated in the April contract.”

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%.

S&P 500:

In our February 21 research note, we informed Bloomberg subscribers that the S&P 500 had generated a short-term buy signal on February 18.  From February 18 through March 4, the S&P 500 gained 4.28%, but year to date is down 2.15%. The S&P 500 equal weight is substantially outperforming the  cap weighted index and has gained 5.93% from February 18. The S&P 400 is fractionally positive year to date (+0.04%) and from February 18 has advanced 7.16%.

When the buy signal in the S&P 500 was announced in the February 21 note, we stated that a move to the 50 day moving average was likely. Also, if the index was able to make a low above OIA’s pivot point, a move to the 100 day moving average of 1999.47 was within reach. Our target of the 100 day moving average was attained last week.

From the February 21 note on the S&P 500:

“On the other hand, the more likely scenario is a move to the 50 day moving average of 1954.05 basis the S&P 500 cash index and 1946.30, the 50 day moving average for the March S&P 500 E-mini. If the S&P 500 cash index can make a daily low above the pivot point of 1932.60, we think the rally can continue to the 100 day moving average of 1999.47. For the March S&P 500 E-mini the pivot point is 1930.75 and the 100 day moving average is 1989.00.”

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.

During the downtrend there were massive increases of open interest in the S&P 500 E-mini, which indicated that new short-sellers were entering the market in large numbers. From February 12-February 18 during the initial three day advance when the S&P 500 E-mini rallied 98.50 points, total open interest declined only 21,917 contracts. This is a tiny open interest decline considering the magnitude of the three day advance. From February 22 through March 4 (7 days) when the E-mini rallied for a total of 121.75 points, total open interest increased on each of the seven days.

Adding the open interest stats from February 12 through March 4 when the market rallied, it is obvious that short sellers are digging in and refusing to liquidate as prices move higher. In our view this increases the likelihood that SPX continues to rally after the correction has run its course.

From the February 28 note on the S&P 500:

“During the rallies of February 22, (21.75 points), February 24 (14.25 points) and February 25 (20.25 points) in the S&P 500 E-mini, total open interest increased each day. This is very positive considering that large numbers of short-sellers entered the market on the decline. This means if the S&P 500 market grinds higher as we expect, short-sellers will continue to add fuel to the upside move.”