As I have expected since late November, we finally got a minor pullback. The financial media is already going crazy over the contagion from cheap oil price, flashing correlation chart and putting some fear into people. This is also evident from the increase in hedging activity and the outsized move of the VIX last week.
Let’s keep a cool head and look at some things. Earlier this week I mentioned a target for Treasuries (http://stks.co/g1Pnk) and a pullback target for index futures (http://stks.co/j1Po3). Both were slightly exceeded on Friday. The way we closed seems to suggest that we have room to extend further. Here is the evidence:
Sasonal Chart
The seasonal chart does suggest a weakness in the second week of December, just as we have seen last week. In fact, even the peaks and troughs of the seasonal chart lined up with the moves last week by sheer coincidence (these charts are just giving seasonal trends, not daily moves).
ESH5 E-mini chart
Looking at the daily Futures charts, we see that we have punched through and closed below the first support level. Unless we reverse quickly, the 32.8% retracement level is starting to look like a more likely target, since it also lines up with the peak from July. That level comes into play at 1970 for the ESH5 contract (around 1980 for S&P 500).
Indicators chart
The indicator chart also seems to miss the final washout spike. Its position is comparable with an earlier stage during the October drop. The spike in $trin is most likely due to the extreme moves in the Energy sector, where we have seen panic selling already, while we saw strength elsewhere. I will analyze this sector in a separate post tomorrow if I find time.
Treasury move
The classic bond contract has already exceeded my upside target for wave B by 10 ticks and if it keeps moving with this strength, we may be on wave 5 already, which would be a bad omen for the stock market (I doubt it). The stong wave volume (bottom) also shows that this up-move in wave B contained more buying than the sharp down move of wave A. However, this does not consider everyone who sold into strength on the bond flash dash (yield flash crash).
Oil weekly
As I mentioned last week, oil still has a potential $50 target, where the 78.6% retracement of the up move, the January 2007 low and the 61.8% down extension meet. Previously this was also my target for the measured move out of the triangle, but after re-examination, that is now closer to $55 on my chart, where w also have the 50% down extension, making $55 another potential level for reversal, although a weaker one.
Oil short term chart
As I mentioned on Stocktwits (http://stks.co/g1PkO) until the steep downtrend line of the current move (see chart above) breaks, it is still too early to think about entering long positions in Oil.
