Oil Divergence From Copper Points To Coming Contraction

The most recent post was a video on how commodities were leading the market lower and how oil had remained buoyant considering the volatility in the overall equity market.

Charted below is a divergence between the price of copper and the price of oil. Oil may be getting close to an area that will put pressure on both the consumer and the producer should copper prices remain weak.

Oil began diverging from copper at the beginning of October when all markets made a YTD low. It took oil just 3 weeks to eclipse the September highs while copper lagged both commodities and equities. At the end of the month, oil made another thrust higher that lasted throughout November. That month, copper was down 2%.

For the month of December, oil is flat and copper is slightly lower though copper is in a much weaker technical position and like the economy, copper is directly vulnerable to headwinds such further elevation of oil prices.


Everyone’s Talking About The SP 500 Symmetrical Wedge – US Total Debt Reaches $15T

If you have not heard by now, the S&P 500 is trading within a symmetrical wedge pattern, which has most in the investing community buzzing. Because symmetrical wedges are generally neutral, they attract quite a bit of attention since no one knows for sure which way it will break. The point I want to make about this wedge is that way too many people are watching this pattern for us to simply buy the first sign of a breakout.

When a more than average amount of people are watching a particular chart pattern, the success rate generally declines. This pattern will play out as a bullish continuation, or a bearish reversal, whichever it is, confirmation must be utilized on any breakout or breakdown of this wedge. Confirmation being a secondary close below the low or above the high of the breakout candle. This method keeps traders out of bad trades, and prevents needless stop outs.

Currently I am short the USO. I took profits on 2/3 of my initial position after the pullback from the 200 MA pierce, and added 2/3 back today after the gap higher. Today’s move looks like an exhaustion gap as it tagged gap window of $39.80 and the pivot high of $39.50. Additionally, the USO hammered into the .618 level before closing lower during today’s 3pm selloff.

USO closed today in a doji formation which leaves the door open for a star or “island” reversal tomorrow. In any case, oil is extremely extended and regardless of the CME margin easing, oil really has no business above $100 in this economy.

In other news, the United States went over $15 trillion in total accounted debt today, a number that is up over 40% in just the last couple of years.


Markets Finish Slightly Negative After Volatile Day

The S&P was down over 20 points this morning after opening lower with a weak jobless claims number and hangover from yesterday’s FOMC meeting. I would be surprised to see a significant amount of selling tomorrow and into next week. The Fed, though bearish did not say anything new that we did not know already. We also know that the jobless claims numbers and economic data is going to be weak so the market has already priced that in, which is why the lows were rejected with a robust rally intraday today. Despite this, I was expecting a selloff today and got it.

I used this chart last week as an example of what happened the last time the market expected news from the Fed and received it. We were expecting QE II to come and when it was announced, the market had a normal positive day, followed by a huge move higher the next day, but topped out just one day after. The exact same pattern has developed in this case only to the inverse since the market was expecting QE II to end.

Like what the expectations were in November, the market expected QE II to end as scheduled without further stimulus. The announcement was made and despite the consensus being met, the market sold off sharply regardless. Today was a big reversal day as the market tagged the 200 MA and finished well off of the lows. Next week is also a holiday trading week which usually comes with an upside bias as of right now it appears that the market has yet again put in a short term bottom.

On the weekly chart of the S&P, you can see the beginning of a bear flag which if it plays out, will take us close to the 50 MA. A favorable bear flag has three bars so another close higher on the weekly chart for next week would be a nice setup for a breakdown of this pattern. I think the market has put in a short term bottom but my mentality here is to not count on one and only stay in trades while there is still momentum in them. The bulls have made it clear that they will not give up $1260 without a fight and there is not a clear side that is in control of the market at this point so once again, protect your profits and refuse to give back gains to the market.

On to some more specific plays, I sold out of TZA at $40.86 for over 7% gains in less than an hour of holding it as I bought near the close yesterday at $38.04. TZA fell sharply afterwards and actually finished negative. I will continue to stress this, but this is why it is important to protect your gains and be in and out of trades. If I had held this for just one day, I would be negative on this trade and would have given about 8% in gains back to the market.

Perfect 3 bar bear flag played out today on the USO. I nailed this in yesterday’s commentary though my price target of $35.20 missed the lows by a penny. I wasn’t planning on entering it as a trade anyway as the upside is only about 5% over the next week, which isn’t bad by any standard, but there have been better setups that I have been watching so I decided not to place an order. Look for this to top out around $37.50.

I won’t claim victory on this after one day but there’s no doubt that this was a huge move and I’ll even be impressed with myself if $152 does turn out to be the medium term top. GLD tested the trendline that goes back to March but managed to reject a break of that and the 50 MA. I think that after today’s monster selloff it will at least rally to the 20 MA but a second test of that lower trendline might send this thing lower and confirm a medium term top.