The drop was more extensive than expected, although our target of 240 held. The market is oversold to rally but the quality of this is important. As of now, we would look for another decline that should complete a bottoming formation.
SPY has rallied to the 290 area, and the divergences led to a sharp drop as forecast. Now, if there is strong breadth for the next few weeks the market could be setting up for a strong beginning to 2019. Otherwise, another drop at the beginning to 2019 is possible.
New Highs/New Lows has rolled over again, and is now negative: It fell off as the market corrected in February, after beginning to weaken before the correction started. Remember that this is a leading indicator that often goes negative first. Now, there has been four weeks of more new lows than highs, suggesting a corrective period could occur.
SPY has rallied to the 290 area, and there are divergences. The market is still set up for a fall correction. The danger is this new high is reversed. Note that RSP has not made new highs (we talk about indexing in the research piece), a sign the market is narrowing. Breadth indicators suggest this as well. For an example of how a false breakout could look, check out the weekly chart of XLP.
Commodities have built a long-term base, and these could be strong in 2018. GLD is consolidating and it is back in our models as a buy. It could test the133 level. Industrial metals (DBB) have pulled back, but from high levels. Oil seasonal weakness may be over – the seasonal bottom is the May/June time period, but it has hit our targets and could consolidate.
Oil seasonal weakness may be over – the seasonal bottom is the May/June time period. Our favorite broad-based Commodity Index ETF, DBC, is at 17.50, our first target, along with oil. Targets are 22 if this can stay above 17.50. Watch oil and DBC carefully –Oil has signs of a seasonal bottom, and it is May/June when this occurs.
The Put/Call indicator is now very positive as it is in areas marking major bottoms. We rate sentiment neutral here because the intermediate sentiment indicator remains in sell mode, although Put/Call has given strong buy indications.
Equities should be a bit choppier due to overbought conditions, however. Breadth indicators have also started to improve, and are not overbought. Equities are set up to rally, and while a short-term pullback is possible that would set up a strong 2018.
Commodities have built a long-term base, and these could be strong in 2018. GLD has surged. We sold it, but it may have bottomed at 117, our forecast price. Industrial metals (DBB) have broken out. Oil seasonal weakness into June has produced a rally, but favorable seasonality ends in February.
SPY and other indexes have broken out. The IYT has confirmed a bull market according to Dow Theory. This should be enough to set up the strong end to 2017 we have forecast. Breadth indicators have also started to improve, and are not overbought. Equities are set up to rally, and while a short-term pullback is possible that would set up a strong end to 2017.
Our current reading of the internal momentum indicators is POSITIVE. The intermediate FBO has a divergence in place but may be a rounding bottom, and is improving. The daily FBO has given a breadth surge. A rally should improve the breadth indicators. We are hopeful as normally the McClellan is the first indicator to improve – and this pattern is starting at this time, and this improvement affects the other indicators. This is happening now.
SPY tested our breakout points in the 241 area, and while it did not become oversold, other indexes have done so. This should be enough to set up the strong end to 2017 we have forecast, and also should provide impetus for the market to broaden out.
Our current reading of the sentiment indicators is NEGATIVE. %Bears moved into sell mode in February. The indicator has gotten slightly worse over the last month. The Put/Call indicator is neutral to slightly positive. Market Vane and Consensus, Inc. figures are showing more bulls – we do not provide but these are now weak and getting worse. We rate sentiment negative here because the intermediate sentiment indicator remains in sell mode, while Put/Call is in neutral territory, after giving a slight sell signal. Put/Call is about the same as the last few months’ reports.
TLT has rallied into our target area of 126 – 130, and failed. LQD looks better than TLT. It has already filled the November gap, and is also weakening. HYG and various junk bond ETFs have rallied and still look strong. TLT has a buy signal on the Monthly stochastic, but the trading action is a concern. This peak could be the last before another major correction that could carry TLT to 100.
We have moved through our “breakout point” suggesting the market can advance into yearend. Our benchmark for this is the 231-area on SPY, suggesting favorable risk/reward. See our January Yearly Forecast Research Piece for more details. We are positive on 2017 overall. Yes, the market needs to broaden out but just WHEN they should end is an open question.