In our research note published on February 15, we expressed our reasoning for the major indices bottoming and said that higher prices were immediately ahead. The note announced that the Dow Jones Transportation Index had generated a short-term buy signal on February 12 and was in our view the lead indicator for the entire market. The notes for February 15 and 21 can be accessed on your Bloomberg terminal.
Shortly thereafter 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, which we announced in the February 21 note: "S&P 500 On Short-Term Buy Signal February 18- What's Next"
The research pointed out the Nasdaq 100 and Russell 2000 had not generated short-term sell signals and this was a potential negative for the market.
From the February 21 note:
"Notably, the NASDAQ 100 and Russell 2000 have not generated short-term buy signals, and this continues to be a major negative for the broad market."
"For the rally in the broad market to continue, both of these indices need to generate buy signals, and though they out performed the S&P 500 since bottoming on February 11, they are major laggards year to date. For the NASDAQ 100 cash index to generate a short-term buy signal, the daily low (at least one) must be above OIA's key pivot point of 4170.00 (February 19 close 4164.09). The cash Russell 2000 is in better shape as it closed above our pivot point of 1008.61 (1010.01 on February 19), but must make at least one daily low above the pivot to generate a short term buy signal."
On February 22, both NASDAQ 100 and Russell 2000 indices did in fact generate short-term buy signals and this provided additional momentum for the market last week. In the February 21 note, OIA also anticipated there would be a further correction after the modest decline on Friday, the day after the February 18 buy signals. We said the pullback in the S&P 500 could extend to the 1885-1890 area. On February 24, the March S&P 500 E-mini made a low of 1886.75 and 1891.00 for the S&P 500 cash index.
From the February 21 note:
"On Friday, February 19, the S&P 500 had a shallow pullback, but we expect more of a correction before the market resumes its uptrend. The pullback could extend to the 1885-1890 area, but should hold at the 1882.00 level. A close below 1882.00 would be very negative in our view, and likely push the S&P 500 down to 1862.00, which is the last area of support before a new sell signal is generated."
Crude Oil And Products:
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.
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. For example, year to date, April WTI is down 16.36% while May Brent has lost only 6.52%. Also, Brent crude bottomed on January 20 and has been moving irregularly higher since then. April WTI made a low of $28.76 and a minor new low of 28.74 on February 11. On February 26 it made a high of 34.69 and closed at 32.78.
On February 8, April heating oil generated a short-term buy signal, and it appears likely that April gasoline will generate a short-term buy signal this week. Year to date, heating oil is the out performer compared to gasoline and has lost 8.38% versus a loss for gasoline of 14.33% 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.
It appears likely the March and June dollar index will generate a short-term buy signal this week. The continued rise in the dollar index may act as a countervailing force against rising oil and equity prices, but not necessarily. On February 4, the March and June dollar index generated short and intermediate term sell signals and from early February through February 11 when the March contact bottomed, the declining dollar index was positively highly correlated to equity and oil. From the rebound beginning in mid February through Friday, the positive correlation among equity, oil and the dollar index has continued.
From the February 21 note:
"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."
The note of February 21 correctly forecasted the move to the 50 day moving average, which occurred on February 25. In the early morning hours of February 26, the S&P 500 E-mini moved to a high of 1968.75 3 1/2 hours prior to the opening of the cash market at 9:30 a.m. The SPX made its high of 1962.96 at the opening and proceeded to drift lower for the rest of the session.
Last week, the SPX made its initial high of 1946.70 on February 22 and declined to 1891.00 on February 24, a range of 55.70 points from high to low. If we use this number as a benchmark for this week's activity, the low for the week should not exceed 1907.26 (1962.96-55.70). Additional support for the SPX should be found at 1922.31, 1918.93 and 1911.57. A break below 1907 would be a negative development and portend a test of last week's low 1891.00.
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. However, once the SPX begins to trade above its median price of 1972.41, (May 18, 2015 high 2134.72-February 11 low 1810.10), we expect the index to engage in a major struggle to move higher.