Been reviewing the market over the weekend, and the more I look, the more I see… particularly something that does not feel right, and is not very obvious. Admittedly, I have read different perspectives, heard presentations, and also formed my own opinions, based on what I thought made more sense. This evidence based modeling is what I can do uniquely as I had always been trained to do so, albeit in a non-financial, but cellular and molecular world. How is this relevant? Alexander Elder, the psychologist trader once said in a workshop I attended with him, that the markets are fundamentally applied psychology. Further to that, the driving forces behind the applied psychology are multicellular beings called humans. That’s an out of this world perception for most people, and I’m probably the MadScientist who is linking these dots up… meanwhile, perhaps a more relevant insight is to share with you what is less obvious that is appearing to be very obvious to me.
The current market sentiment is one that is very volatile, and one that appears to be more bearish than not. However, there is a very small group of seasoned and intellectual market observers who project a (very) bullish case going forward from 2019. I understand their various and different perspectives, and weaved a model combined with my own technical analyses… and it looks very very plausible, with probabilities growing. Given a set of prerequisites, we should be able to qualify if this bullish case modeling is on track as time progresses. Let’s look at the charts and see if it makes sense…
We start with the Energy Sector, XLE… This sector had been beaten till it made little sense. Based on crude oil, which saw 40ish prices for the second time in a decade, this appears to be a second bite of the cherry, that could double in the next few years. The XLE monthly bounced off a channel support in December 2018, and is attempting a reversal. This comes after what appears to be a higher low, compared to the previous Sequential setup at the end of 2016. It is currently at a TD resistance and breaking above the current level for January would indicate a very good bullish attempt.
Going into the weekly XLE, one can see how the downside target was achieved and then quickly rebounded from a very oversold condition.
We need to look at the underlying asset of the energy sector, crude oil (futures) to have an idea how the sector would perform. The weekly chart of WTI futures show how the oversold condition came about. Previously posted a couple of weeks ago, that crude was expected to break below 50, and reach 45, it did just that. How it was obvious was the TD Sequential, where candle 8 & 9 did not make a lower low than the low of candle 6 or 7.strange rule, but it works every time! So, the consequence is that after the Sequential Setup is done, within the next three candles, there would be a spike down beyond the lowest point of the Sequential Setup. It has to happen before it can reverse the short term trend. This is a perfect example of what was to happen and it happened on point. Amazing stuff, isn’t it? In any case, looking forward, Crude needs to move towards 52, and breaking above it would see 64.
Another commodity that took the headlines of late is Gold. Gold had bottomed out in November 2018 and is looking for much more relevance in a bull rally, at least to 1360, another 6% upside. The MACD is getting to be very supportive of the rally too.
Perhaps one would wonder why and under what circumstance can Gold and Crude Oil rally together. The underlying transaction of these commodities is the US Dollar, and here we then look into the USD Index. The USD had been appreciating for the later half of 2018, but it seems to be stalling. The MACD indicates a very tired bull in this rally and breaking a near term trendline support would mean a -5% drop. With a likely USD retracement, we can expect the commodities to do better in 2019. So watch for this breakdown.
With a drop in the USD, the is likely to be a concomitant upside with the S&P500. And looking at the weekly chart, a similar scenario presented where an oversold condition to the earlier set downside target is met with a strong rebound and there is continuation for a second week. Although the MACD appears to be lagging, and does indicate a bearish scenario, this is where it can, and probably will break from the obvious expectations of a bear market. If so, then a near term resistance about 2600 would be in place and passing that resistance should put the next target at the last high. But the time it reaches there, gross estimate middle of 2019, we would be very sure of a bull rally, which is probably too late. LOL.
One thing is for sure… Volatility. See the range of the last retracement in 2015. The 2018 retracement volatility range is twice as large, and one can easily mistake a retracement for a bear market. Also note how similar the weekly candlestick actions are where it bounces off the trendline and 55EMA with a long tail. The next to expect is a break out of the boxed range, if if so, you can see what might be next – a massive rally.
So, given the lofty bubblylicious state of things, there. Is so much money in circulation and it has to go somewhere. While some economic data looks moderating, the next piece of the bullish puzzle might just be fiscal stimulus from governments. This may come after next week when superpowers US and China meet… at this point, it is just a theory and modeling, but watch for it.
Case in point, Trump has a knack of creating problems so that he can solve it to be 5e hero… this happened at least twice in his term so far, so expect a similar modus operandi.
I would be getting ready for 2019and beyond; and be very nimble. Definitely not the time to conveniently invest and forget. In fact, have a good plan, review frequently and stick with it!
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