Let’s take stock of the damage in equity markets thus far.
As we write, the S&P 500 is off its highs some 9%, the NASDAQ almost 12%, and the DOW is down 10%.
Those numbers aren’t encouraging, certainly, but when matched against the performance in China (– 40%) or the emerging markets overall (– 31%), they’re but spit on the sidewalk.
What’s worrisome, of course, is that globally the general trend of the markets is down. In what’s termed by technicians the ‘law of commonality’, we could shortly be witness to a pile-on effect, whereby everyone who hasn’t sold simply does because his neighbor has.
And if that, indeed, happens, we could also see continued, sustained selling for the intermediate term – call it anywhere between three and eighteen months.
For the bulls, on the other hand, all the cards are on the table – they’re hoping that the current bounce will carry higher and farther than anyone thinks, set a few new highs hither and yon – in at least one or more important sectors – thereby signaling a break in the downtrend that has dominated equity markets for close to a year.
And look who’s marching at the head of the bull parade…
We would like to point out that the bulls are actually finding support in some powerful quarters. A look at the charts of tech stalwarts Facebook (NASDAQ:FB), Alphabet Inc. (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) demonstrate that there’s something stirring beneath the mud.
Despite the prevailing pessimism and apocalyptic garble daily smeared across the blogosphere, all of these stocks have rocketed higher in the last few trading sessions, Facebook by some 28% in just eight trading sessions, setting new, all-time highs and carrying the torch – we believe – for a higher market before an expectant bullish throng.
Repugnant Ghoulish Thong
Below, by the way, is the chart of the above mentioned stocks for the last ten weeks. In addition, we’ve included a couple of surprise names on the paste-up, two companies whom, you’ll notice, have also bucked the trend.
In addition to the tech melt-up of the last few days, a number of other companies have jumped on the bandwagon. And from the retail sector, no less! We’ve included just two: one high-end, Coach (NYSE:COH), and one for us rabble-rousers, Wal-Mart (NYSE:WMT), though numerous others are showing the same trend. And what’s the guff? COH and WMT are up 23% and 17% at a time when the overall market was cratering!
…hell is going on!?
Now, we understand as well as the next laddie that the rise we’re seeing now across the indexes is a reaction to all the selling of the last few months, and it’s still unknown how far it will carry. Shorts are being covered and speculators are jumping aboard to make some cash on the retracement. But whether the thing genuinely has legs is indeterminable at present. If the Facebooks and Googles are a sign of more heat to come in the middle of winter, then we could see a stunning rebound. If they’re just an anomaly – and if the retailers we included are also outliers – then we’ll concede defeat and admit the jig is up.
But until that time, we have to remain on-board bullish, at least until a retest of the former lows occurs, or we see new, higher highs on the indexes that indicate we’re over the worst.
Have a look here –
The chart makes things perfectly clear – support arrives at roughly 15,400/15,500 (in green), while resistance will be encountered at 18,000 – 18,300 (in red). Any move below the former or above the latter would most likely continue in the same direction for months to come.
But the chart also presents some very high barriers for the bulls. Indeed, the path of least resistance is lower, to be sure. A declining 137 day moving average, now at 17,000, and the long term, 411 day moving average, now at 17,400 (in black), represent sizeable hurdles on the way to setting higher highs.
In the bull’s defense, however, here’s one more item: the chart shows the Dow’s Relative Strength Indicator (RSI) about to punch above its midway ‘waterline’, a development that’s positive, though inconclusive until it’s confirmed by a similar surfacing on the part of the MACD indicator. For her part, MACD has crossed over toward her waterline, but is still likely two weeks away from any confirmation.
We’ll be watching all these levels closely, and while our bias remains on the bullish side, we’re always ready to admit to new evidence and change our posture.
Before the Trade, a Brief Word on Oil
It’s our very strong conviction that if the price of oil does not stabilize soon – say, within 60 days – the Federal Reserve will take action to weaken the dollar in some manner. Call it QE4, or whatever you want, but it will come to pass.
Everyone in the country stands to benefit from it in the short term – Wall Street, Main Street, Obama, the Democratic presidential wannabes, all except those running for the Republican presidential nomination. And that’s precisely why it will happen.
As for today, we have the following to offer.
Look here –
This is a chart of retailing behemoth Wal-Mart (WMT) for the last six months. It’s charted against the SPDR S&P Retail ETF (NYSE:XRT) to give you a sense of Walmart’s recent outperformance against her peers. And it has been impressive.
Moreover, there’s nothing in the volume figures (in red) or in the RSI and MACD indicators (in green) that would indicate the latest strength has now been sapped. On the contrary, we see a healthy halt in the rise of the shares at the 200 day moving average (brown line) that we fully expect will be overcome by week’s end.
The following trade is predicated on Wal-Mart continuing to lead the sector.
[mepr-rule id=”994″ ifallowed=”hide”][mepr-unauthorized-message][/mepr-rule]
[mepr-rule id=”203″ ifallowed=”show” description=”wall_street_elite_members_only”]
Wall Street Elite recommends you consider buying the WMT June 72.50 CALL for $1.13, and selling the XRT June 43 CALL for $1.22. Your credit is $0.09 per pair traded.
[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]
With kind regards,
Hugh L. O’Haynew