By Frank Barbera CMT. December 30, 2008
As we close 2008 and get ready to ring in the New Year, I thought that in today’s abbreviated WrapUp I would point out a few important technical markers for the various markets. While the trading action in the stock market has been lack luster of late, with low volume dominating the end of year trade, the overall chart configuration for the S&P still has at least some near term promise. As I see it, key resistance for the S&P is well defined at the 915 to 920 area and any move above that zone would be a recipe for higher prices in the early going of 2009. Mind you, I am still very cautious with regard to the stock market as the outlook for the first half of 2008 is bound to be one of continued turmoil and a down market. Yet, I believe that the counter trend rally that began in late November could possibly extend itself into the early to middle portion of January.
In the chart below, I show the S&P with its daily 50 day trading bands and the 9 day Welles Wilder RSI. Importantly, at least so far, the 9 day RSI has NOT moved back up across the range to a fully overbought condition. Usually, a fully overbought condition occurs above +70 on this gauge, which stands at +47.85 as of this writing. This hints at more upside potential for the S&P in the near term. In addition, the 50 day upper band has not been tagged since the secondary peak in early May of 2008.
During most normal stock market cycles, the 9 day RSI will move back and forth between overbought and oversold at most, every 100 to 110 trading days. In the next chart, I go back to 1970 on a daily basis with the S&P 500. Believe it or not, since 1970 the current streak of depressed RSI values is the longest on record. In the lower clip is presented a Time Span counter, which in this case counts the number of trading days without a 9 day RSI above +70; in other words, without an overbought value. Obviously, this type of reading at a total of 306 trading days and counting is now way overdue suggesting that the bear market bounce in equities may have one more leg up left in it before it peters out.
In the next chart, I show the S&P going back to 1970 with just the upper 50 day Bollinger Band. In the lower clip is a time span counter that counts the number of days wherein the S&P has NOT closed ABOVE, or outside, the upper band. Again, we see about 307 days and counting. As of this writing, the S&P stands at 880.43, with the upper 50 day band at 983.07. That implies another 11.70% upside in order for the S&P to move up and close outside the upper band. In reality, the upper band is actually declining a few cents every day, so depending on when the S&P actually begins a move toward the upper band, the net upside may end up being somewhat less. Nevertheless, the current time span in this second gauge is also very extended and one of the longer streaks on record.
Another market I have been focusing on a lot over the last few days has been the badly depressed Oil market. For Oil, some of the same characteristics are in place. For example, in the chart below I count up the number of days Crude Oil has gone without a 9 day RSI reading over +70. Again, in measuring the absence of overbought readings I see a one-sided market where some type of recovery bounce and further rally should be in the offing. It has now been 122 trading days since Crude Oil last reached a fully overbought value above +70 on the 9 day RSI and as can be seen in the chart below, at least going back over the last decade or so, a recovery rally of sorts would appear overdue. In my view, a rally back up to the low $50 area for Crude seems like a reasonable target given what has been a decline of nearly $100 per barrel from the highs.
Above: Crude Oil with GST Composite Cycle Model for Crude Oil – next nesting of major
Cycle lows comes due between June 5th, 2009 and July 12th, 2009.
Finally, while both the stock market and Oil appear to have some additional near term upside, perhaps in early January it is also pretty clear that in both cases the months ahead will remain challenging. In some of my earlier work on Financial Sense I suggested that a second half recovery could be in the offing for 2009. In this event, I would expect both Oil and the stock market to remain within the confines of a bear market during the first six months of next year, with the action from May to June forward holding the best hope for a more sustainable recovery in both markets. In the final chart shown above, we see the composite time cycle model for Crude Oil which is targeting a major cyclical low between June 5th and July 12th of 2009. I will of course be keeping investors updated on these markets between now and then. That’s all for now,
Have a very Happy New Year!
© 2008 Frank Barbera