April 29

Summation Index, Crude Oil

There is a lot of bearishness in the US market. But I wonder if we will start a decline from this level. There is a lot of bearish signals and sentiment in the markets already and usually the market does not get what it expects. A lot of stocks, especially small- and mid-caps are in downtrend already. A lot of downside energy is spent and in respect of forces of supply and demand, I have my reservations if we will start a major decline from here. Pullbacks had only little follow-through which indicates that demand is still able to absorb supply (more buyers than sellers). It appears to me that the market wants to take out 1900+. I am closely following the breadth indicators McClellan Oscillator and Summation Index for the US as well as the Australian Stock Exchange. The Summation Index is a good indicator for mid- and long term market assessment. It shows a smooth up/bumpy down pattern which indicates strength rather than weakness in the current market environment. Only if the Summation Index rises to a higher top to form a divergence between the previous cycle high then we can anticipate a more meaningful correction. Otherwise, ordinary pullbacks and shallow corrections can be expected.

 Summation Index

I came across the attached two charts comparing the price of oil and DJIA set 10-years forward. While the pattern looks very similar, tops and bottoms can be out by a few months or even years. But the general trend is matches quite well. The opinion is that we might not see a rise in DJIA as steep as oil had in 2008 and the consequent fall will not be as severe either. The chart suggests that we should see bullish prices in the years ahead, at least until 2018. The zoomed in chart shows that we can expect the usual pullbacks and corrections but they do not suggest long-lasting bearish trends for now.

Curde Oil 50-years Curde Oil 120-years

In saying this, I respect that a break below 1830/40 would endanger the current positive view and a retest of previous swing and cycle lows can be expected. A rampant buying climax to, say, 2000 could lead to a more pronounced reversal of the uptrend as the technical picture in breadth indicators would then look much worse than now. So take your pick, a decline from here for a shallow pullback or a trend reversal from higher levels for a larger correction. Either way, the current levels may not be inviting for aggressive long positions but I struggle to go short the market as well.

Category: Notes on U.S.