Monday May 7, 2012
The chart on the SPX we posted May 2 appears to have nailed what is about to happen.
Readers will note we have been adding a 125 day MA as it splits the difference between the popular 50 and 200 day MA that default on most charting programs. It is particularly interesting on the SPX weekly chart now.
In the previous sell offs in 2010 and 2011, the second week was a doozy. The SPX dropped about 125 points each time. This will be the second week after last week's down performance.
Now about that 125 day MA. Notice that the market overshot the 125 in 2010 and 2011. It then found support at that level before recovering. A pink trend line from that 2010 low tacks the 125 MA quite well. That would put the market in the 1225-1250 area. At that point the MACD would be oversold enough to cause a decent summer rally, just at it did that last two summers. Now that I look at it, the extended down moves in 2011, in August, October, and December may well be signalling the bigger bear experience to come later this fall.
Crude Oil
Sa
This is the same time frame and the same indicators with but for crude oil instead of stocks. But crude has registered a lower high and the longer 200 day MA is already headed down. The added wild card is that the oil natural gas ratio chart, see the weekend update, has turned decisively down. And it is turning down from an historic 50 to 1 extreme. There is no shortage of oil supply in the world. So the real crash may be in oil rather than stocks, though stocks appear posed to correct sharply.
Recall that we noted the under performance of Energy Service Stocks relative to oil, commenting that the service sector was predicting real problems.
Let's take a look at the XES Oil and Gas Equipment and Services Index
XES
From top to bottom we can label these three charts
WEAK
WEAKER
WEAKEST
Again this is the ame time frame and the same indicators.XES has already broken the 50 day MA and looks ready to drop through the 125 day MA. This suggests the shale oil and gas play that has spawned overnight boom towns in South Texas and North Dakota may be in for a needed correction. The Service companies are the real pulse of the energy industry, not the actual production companies. It is forever boom and bust, high oil prices bring great demand and the ability to charge high prices. As I write service companies literally have billboards advertising for truck drivers in South and West Texas.
Can you spot the big triangle? A downside break would likely be severe.
Socionomics
We have written extensively about the growing negative social mood. Note this morning's headline in the WSJ, Voter Anger Sweeps Europe. We have described the US as being in a New Civil War, that prediction continues to validated every week. Recall an EPA employee resigning over his comment that he enjoyed crucifying oil and gas companies just as the Romans had done to conquered Turkish towns centuries before. There are plenty of Federal Regulators still in place that are of that opinion.
We have repeatedly commented that this is all in an effort to help prepare you for a negative mood that will eventually wash over markets world wide. We featured Robin Wong's blog from Malaysia this weekend. Robin did an excellent job of photographing the April protest there.
The number of stories reflecting negative mood in this morning's WSJ is quite indicative of what is happening. Protests in Moscow over Putin, throw them out in Greece, try someone other than Sarkozy in France, Merkel and the new French President don't see eye to eye, this is preview of what to expect at Dow 6,666.
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