Why I am still bearish right now: A look at Oil and the S&P 500
I have been away for a few weeks, but when I looked at the market this morning after coming back, I saw nothing to change my bearish outlook that I had before I went on vacation. In fact I am even more bearish now. Many of the markets are overextended and extremely unhealthy. And like a rocket that can't quite achieve escape velocity, this market will come careening back down to earth. Here is a look at oil and the S&P 500
First Oil. As we have talked about many times on this blog, oil and the market should NOT trade in tandem. There are certain times where they will positively correlate (such as growing economic conditions which require increased energy consumption). However this time is not now. Yet oil and the S&P are showing very similar patterns and neither are healthy.
Why I don't like this chart:
If oil had pulled back 3 weeks ago when I was calling a top, and had been diligent, pulled-back, retested the 50day MA, and got the correction out of its system, oil would be in an awesome position right now. And I would have a lot of money in it. But now?? No, I have no position (short term trading position, I still have all my long term positions). Oil has been trying to defy gravity. It made no significant pullback from $55 in early April, and instead tried another run at $55 last week from overbought conditions. Simply a recipe for disaster. Now it is flirting with the 50day MA. But as far as I am concerned, this is now false support. The 50 day MA is now at a much higher level (~$48), vs. the $43-$45 it should have been at for a good retest. Now that oil has spent so much time in this overextended state, I believe the correction could be more severe. Will it? Who knows (I don't), but I will not even begin to be bullish at this point until $44 and not start putting down real money until $40-$42.
Intermediate term, I am still very bullish on oil and think a run up to $77 is still very likely, but I firmly believe it will not originate from these levels. I will not put money into oil until I see a constructive chart, and this is far from a constructive chart IMO.
Geez, What a train wreck.
I think the notes on the daily chart above are fairly self-explanatory. This still looks very overbought, and every move up was accompanied by more moves down on the indicators. Ugly. That's all I have to say.
A look at the hourly chart, Here is what I think this is the most likely count:
All of the analysis that I put together on Goodvibe's blog 3 weeks ago still stands. The reasons I listed for being bearish when I was putting together my preferred count vs. a more bullish count are still in full force. But why is this the right count (at least in my opinion). Besides those reasons, here are a few more:
From EWP, Frost and Precter pg. 78
Wave 3 - Strong and broad, trend is unmistakeable (definitely the case)
Wave 4 - Differ from second waves of the same degree, more often than not they tend to trend sideways (I say the count above captures this spirit)
Wave 5 - Always less dynamic than the third wave in term of breadth. Usually display a slower maximum speed of price change as well. Look for lesser volume as a rule in the fifth wave as opposed to the third (again, this story fits here as well).
The ending diagonal for the 5th wave showed a marked break. The rally last week has been unable to top the end of Wave 5. And if the count above is correct, this will be the case for the next several weeks as we will see much lower lows.
So when I reviewed the charts last night and this morning, I used up almost all of my cash reserves am now nearly 100% short. I think the markets have been really overextended the last 3 weeks and this will make the retest that much more painful.
To reiterate, all of this is just my opinion of course. I do believe there will be a very large rally that will last for months after this pullback, but I just simply don't believe the rally will originate / continue from these overbought conditions.
The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.