Market Recap – Oil Surges +6.2% – 22 February 2016

The S&P 500 closed into resistance of 1,950-1,940 with a weak-form risk-on sentiment. The Markets finished in the green but defensive assets like bonds (TLT) did not sell off suggesting investors were not convinced and held on to their defensive positions.

The big driver today was Oil again up over +6.2% which once again demonstrates the close correlation between Oil and equities at this time. I have included a daily chart of the Crude futures with a the downtrend regression channel to give you a little perspective on the current move in Oil prices. $31.50 is a clear battle zone that has acted as support and resistance several times.

A move back to $34 is the next logical step before Oil concedes to the fundamentals of oversupply and weakening demand. Will Oil make a new low?…perhaps. A rollover sometime soon seems likely which does not bode well for the markets in the intermediate term.

A quick look at Market Breadth ans sentiment shows a move into a caution area for long Swing and Position trades. The S&P 500 has moved into a resistance area which should gives the Bulls some trouble in the short term.

The Good: Market have a nice Bullish Divergence working for it here as price has made a double bottom with the Market Breadth gauge making a higher low signaling less stocks participated in the recent market low of February 11th. The subsequent rally also had broader market participation to the upside when the Breadth gauge shot back to an overbought level. Keep in mind overbought readings do not necessarily mean sell. They can remain overbought for long periods during strong rallies. For now it signals short term caution.

The Sentiment indicator has not reached the extreme Bullish level needed to generate the sell signal. It remains near the trigger line but Bullish enthusiasm has not reached a fever pitch in the short term yet. This gives the rally a little more room before you start to get bearish again.

The Bad: Volume on SPY, DIA, and QQQ have been very light during this rally. Not the Bullish rocket fuel you would like to see for a sustained rally to continue.

The UGLY: All US indexes are at some pretty good resistance and the down trending 50ma. Bonds continue to look strong despite the short term pullback and there is no fundamental basis for Oil to start moving higher in a significant way. Gold seems to have changed sentiment in recent weeks which could be the start of a longer term change in the shiny Yellow metal going forward. It’s too early to tell and a strong US dollar remains a headwind with the rest of the world De-valuing their currency there is no catalyst for the US dollar to change course just yet.

A recent breakout in the Yen is also a harbinger for US equities longer term.

The yen’s rise against the dollar is a big cause for concern, feeding on itself because of what is known as the carry trade. Investors often borrow yen to buy other higher-risk investments. But when those investments fall in value, investors have to sell them and rush back into the yen to cover their positions. Since Japan is such a big exporter of goods, a more robust yen hurts profits for Japanese firms as sales from abroad get translated back into yen. And that’s on top of the financial pain caused by weakening global demand. So the more that the yen climbs, the worse Japan’s stock market will probably do, which tends to cause a ripple effect on European and U.S. exchanges. BusinessInsider.com

If you have long Core and Swing positions tighten your stops and be on your toes the Bears can come out of their caves again at any moment.

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