ChartsEdge trading commentary regarding market sectors and forecast correlations

This weekend Mike Korell has chosen to share at his public page a commentary about correlation of his forecasting tools with market sectors. Another new and interesting twist on using his forecasting tools for trading purposes (thanks again Mike)! This commentary is as it appears at his Daily Maps webpage, http://www.chartsedge.com/wp/:

=============

ChartsEdge: Sectors

Posted: November 28th, 2010 | Author: Mike Korell | Filed under: One-Day Market Map | No Comments »

Sectors on Monday
I decided to take a look at other sectors and how well they matched up to the BetaP data. I have always figured that the larger the market, the better would be the fit…. Not so true as I found out!

If a market is manipulated to any degree, that causes the relationship between the cause and effect to be skewed a bit. The S&P gets shoved around quite a bit actually. Small caps to a smaller degree. For example, the S&P has a Rho of .68 for the last month while the small caps have a Rho of .78. The correlation is obviously much higher.

Here is where it gets interesting… The best Correlation Coefficient I found was a .94 for oil and gas sector.

If I stick to Profunds sectors which are leveraged and have inverted versions, the sector choices for Monday are:

UKPIX - Ultra-short Japan
REPIX - Ultra Real Estate

Unfortunately, the BetaP shows OIl and Gas as flat on Monday.

Other high correlations include the US Dollar (which has no leveraged version at Profunds) and Treasury bond rates (once again, no leverage).

While I did not test all the funds, I thought I would mention the worst fit… the international fund. It had a Rho of a meager .62. If you think about it, thats not much worse than the S&P 500.

Stock market risk rising as the dollar renews signs of strength

Looking across the markets I see signs consistent with the idea of a significant swing high in August followed by more weakness. I was only able to pull a chart of the S&P 500 index ($SPX), below - you can see it's below the 200-day moving average and challenged by other moving averages on weak indicators. The dollar is poised to print a bullish reversal pattern if/when it rises from a swing low over the next couple of days or so (bullish for the dollar suggests bearish for equities and almost everything else). The euro is poised to do the same in reverse (bearish for the euro if it follows through on this). Oil looks poised to print a bearish continuation move lower, as is gasoline (UGA) which has already broken a new swing low. Gold looks weak in this picture but read Andre Gratian's gold update with GLD (posted here recently below) for details.

Therefore I believe that today is part of a countertrend move in many markets that will only last another day or so before resuming the strong movements we saw over the preceding five trading days. If the bulls are lucky that resumption would only last another five or so trading days. If the bears are lucky then it would indeed last and languish into October. So it's time for all my readers to be alert, look sharp, and let's be on our toes to trade in the right direction as the next several trading days unfold. Opex is one game, but we're talking about the bigger swing view picture that swing traders, KI$$ traders and position investors want to make sure to be on the right side of, to avoid losses (and hopefully pocket gains).

Temporary support likely to give way for crude oil and gasoline prices that appear turning to downtrend again

Crude oil and gasoline were down today (unlike natural gas which has a path of its own), and to my eye it's part of a trend reversal that will take both down deeply. In fact, it is possible that the entire rise since late 2008/early 2009 could be characterized as a choppy, counter-trend bounce. If that's the case, then it might perhaps be an Elliott Wave "B wave" but I don't want to claim that's a certainty since the length of time seems longer than a B wave should be - I'm just not certain about that. But I do believe a retest of those 2008/2009 lows may be on the way.

Price fell steeply already this week from the channel line retest I described in my earlier post(s). It tested lower Bollinger Band support today, so that may suffice for a bounce or consolidation. Check out the 50-day moving average (MA) crossing under the 200-day MA - that's a bearish cross that also goes along with the idea of a trend reversal. It's in both the $WTIC (oil) chart at right, and the USO (gasoline ETF) chart below. At bottom is my monthly chart of $WTIC.

On my monthly chart, you can see that crude oil has fallen under that big channel trendline, but still above the monthly Bollinger Band midline. But the indicators are negative. So long as that StochRSI indicator (upper part of the monthly chart) is down there, it's a signal to stay on the selling side until it crosses back up again. Meaning, the StochRSI doesn't necessarily tell you that it's oversold, it's more of a trend indicator and doesn't signal a turn until it's crossing upward again from the solid area under the 0.2 level.

As I posted previously, I can see a target for crude oil around $50 which could also go along with a test of the lower trendline on my monthly chart. Obviously, falling under that would be even more bearish for crude oil price targets.

Oil re-testing support so watch for a potential failure

Time to look at oil again! As I tweeted yesterday, it was looking heavy based on both the cash ETF - USO - as well as the gasoline ETF, UGA, moving under Wednesday's low. A few weeks ago I'd commented that we needed to be alert for a retest of the 2008/2009 lows, even if it moved higher first. Well, oil did manage a nice high clearing above the .382 Fibonacci retrace level of $78 in $WTIC, and almost toward $90 (where approximately $92 would test the .50 retrace to the $147 peak). So now it's time to be alert for a failure of support and significant I've down. While it isn't absolutely guaranteed, it's moving into a weak cycle time, and take a gander at how my charts look now. On the daily, it bounced heavily from lower channel support, but could fall under that on a retest (overnight futures now being quoted down around $73 area). Failing the low $70's and under $69 renders it more vulnerable; it needs back over $78 to regain strength (hence a possible buy or stop area if trading it defensively).

My monthly chart also shows oil at an interesting test area. It's been crawling up that one trendline, still threatening to lose that support! The monthly chart indicators have also cycled down. While I'm not sure what "fundamental reason" will appear to "justify" lower oil prices, the technical and cyclic picture is that oil prices do look vulnerable to re-testing the lows. So at minimum, don't be surprised if it happens!

XLE unlike crude oil, gasoline and natural gas, is downtrending

There's been discussion of the energy sector since Monday when Exxon announced buying XTO and XOM fell. So when I was reviewing some of Tony Caldaro's Objective Elliott Wave (OEW) public charts tonight (links at right - thanks again, Tony!), I took a look at XLE, the energy sector ETF. Tony's daily and weekly charts are below. The OEW markings imply that this sector, too, has the status of having topped a bear-market rally and now rolling over. So although broad indices like the Dow and Nasdaq are still relatively high and haven't confirmed a similar top yet. So if you're wondering which way to go with this - consider that in a downtrend, the idea is to sell rallies, not buy dips. True, XOM already made a handsome drop to its 200-day moving average, and might bounce temporarily (or not). Bit that drop was on real volume. Given the markings on the XLE chart, this sector still has a way to go before finishing its low.

The expectation is to re-test the previous low marked as "A" on Tony's weekly chart. That could mean landing about at that level; or could possibly mean carving a substantially lower low over the coming months. So dear readers, please be careful not to catch a falling knife. I did tweet recently about buying some DIG, my effort to go long on oil since I want to give crude oil - the commodity - the benefit of the doubt as having made its low and ready to move up to higher highs. But that's different from the company stocks (and maybe DIG wasn't the right choice, probably USO and maybe UGA (gasoline) would be right). Company stocks that travel with XLE should be treated as downtrending unless they prove otherwise.

Stock, currencies, and commodities markets ing may get (temporary) support against the US dollar

Many markets do seem to be moving contra the US dollar, although not all of them. But the inverse trade seems to be working right now for gold, euro, yen, oil, gasoline, and many stock markets including those in the United States. I'd pointed out Tuesday evening that gold would probably try to make a low on Wednesday, and that type of action did seem to apply also for oil, gasoline, euro, and the SPX and other equities indices. Now we should start seeing if there's some bounce (or more) in many of these. It may have to do with cycles, or just the typical timing of these things. But looking at the Bloomberg's (mobile site) Americas, futures at http://mobile.bloomberg.com/markets/americas.html, indicates that indeed it seems time for buyers to show where they can take the markets. If all they can manage is a moderate bounce with low volumes, that will be a clue for swing traders that a larger-level (trend-reversing) correction is underway.

Now we'll also be looking for divergences. One is the yen, which actually started its bounce a few days ago. If the yen is trend-reversing, then I'd expect it to start moving lower again very soon. But I'm not convinced about the yen moving much lower. Especially if we get the dollar weakening, that should normally help support the $XJY (FXY) yen. Even though it dropped smartly, its bigger picture suggests that it should regain and stay over the 111.49 $XJY (FXY) Fibonacci pivot. If it cannot, then perhaps something more bearish for the yen is unfolding after all.

Also, speaking of cycles, and responding to comments - don't forget that the ChartsEdge maps are merely snapshots of cycle projections using different methods, and are more robust when they "agree". Remember, their full week-ahead look suggested strength later in the week. Besides, I personally (speaking for myself) think they are more subject in the afternoons to being overtaken by event bias - that's just my thought. Put that together with my thoughts on the likely pattern of the dollar and the "dollar-inverse" markets going into some consolidation as started yesterday. So just take that as it plays out and look for signs of whether any of these show real strength on a reaction today/tomorrow.

Futures
Dow	10,354.00	24.00
S&P 500	1,099.40	3.80
NASDAQ	1,797.25	4.75
S&P/TSE	676.00	0.70
Mexico Bolsa	32,000.00	-10.00
Brazil Bovespa	68,152.00	415.00
Currencies
EUR-USD	1.47	0.00
USD-JPY	88.34	0.48
GBP-USD	1.63	0.01
Commodity Futures
Oil	70.99	0.32
Gold	1,124.50	3.60
Natural Gas

Oil and gasoline now downtrending - but how far down might they go?

Oil and gasoline lost trendline support and have done trend reversals to enter downtrends. Meaning, the right side to take is the short side (or sold into cash, but not long!). But how low might they go? I'd been thinking that the rally up in oil and in gasoline was a B wave, bear-market rally that would send them down to new lows. But that last poke up to new highs made the move look more like a 5-wave, not consistent with a B wave. And I see that Tony Caldaro who describes oil as downtrending has placed an impulse count on it - specifically, as having finished a wave 1 up so it's only to be dropping in a wave 2 (the count marked on Tony's weekly chart of $WTIC, copied in below among my own charts of oil and gasoline - thanks Tony!)(you can see all his charts at his OEW site, in the sites list at right). A wave 2 normally goes deep (so it's very tradable, in this case short), such as to a 50% or 61.8% or 70.7% retracement back to its origin. That's a significant pullback, but it cannot by definition go to a new low.

So it should be tradable on the short side for a trend-following continuation approach for the expected move down. Even those who feel bullish about oil (and gasoline) should be thinking about selling, then either re-enter if/when it returns to these levels for a breakout - or better, re-enter at lower prices when the next substantial (e.g. wave 2) low can be confirmed to pave the way for the next big move up.

Most trading and most traders should always follow the trend. If you don't know the trend, don't be trading it. The only exceptions are trend reversals - which means entering for the new direction after the reversal is clear and can be confirmed. (The other is scalping and I won't go into that here and now.).

PS to the reader who wants to ask a cycles question about Tim Wood's cycles work - just go ahead and ask it in a comment here, I'll be able to post an answer via a response comment.

Gasoline prices back up 61% after 60% drop: Chart of the Day

I've expressed skepticism about the ability of oil and gasoline prices to make higher highs, even though there can be theoretically higher targets based on mathematical Fibonacci retrace levels at higher levels. Below is one of my gasoline price charts. Then next will be the free "Chart of the Day" of this week, which also is looking at this.

Chart of the Day
August 14, 2009

One positive outcome of the financial crisis was that gasoline prices did plunge from their record highs – down 60% peak to trough. Beginning at the end of 2008, however, gasoline prices have surged and are currently 61% above their December 2008 lows. Today’s chart provides some perspective on the recent spike with a long-term view of the average US price for a gallon of unleaded gasoline. It is interesting to note that most gasoline price spikes were a result of Middle East crises and often preceded or coincided with a US recession. So while gasoline prices are currently well below the record high levels of 2007, this recent rally has brought prices to a level well above what was witnessed from 1984-2004 – a two decade span of relative energy price stability.

Chart of the Day is provided to subscribers without warranty of any kind and accepts no responsibility for its accuracy or for any consequences of its use. Journalists and bloggers may post the above free Chart of the Day on their website as long as the chart is unedited and full credit is given with a live link to Chart of the Day at http://www.chartoftheday.com.

Golden ratio proved bearish for gold, silver and oil, bullish for the dollar and bonds - does it last, or reverse?

Gold continued lower again from the "golden ratio" Fibonacci .618 retrace that I mentioned this morning - and interestingly, dropped to a .618 retrace to its most recent swing low! US bonds represented by TLT continued up out of their recent low which also represented a .618 retrace to their prior low. As for the dollar, if you've been reading here any length of time, or browse my prior posts (e.g., "US dollar" label), you know its move up is from a .618 retracement area on the monthly charts! I think we could find a few more examples, as the recent rallies in silver, oil, gasoline, and likely some other items, tested to their .618 retracements to prior swing highs ... before dropping smartly the past few days. The banking and financials have tried to break out these past two trading days, but are looking weak and making me wonder if they can drum up what's needed before the music winds down. What's next, where does all this lead?

First, recall all the analysis and table-pounding I was doing over the past 3 or 4 months, about the currencies charts, especially the dollar and euro, and gold. Also of course oil. In all these I showed the potential for the big picture to shift again to the deflationary themes suggested by the long-wave cycles. After all that, it got - er, frustrating? or at least boring - as the dollar, euro and gold meandered. But I hope my readers didn't forget. Since then, we saw oil and gasoline fall to that .382 retracement I showed, then bounce up, while we all went through the head-and-shoulders head-fake drama. Then this past weekend, I showed how the S&P 500 and Nasdaq Composite reached important Fibonacci levels, with the QQQQ's nearing one also (39.82 representing 50% back to their 2007 highs). As the Shanghai and some other indices appear to be doing similar ... And the DJIA, NYSE and - perhaps - the Dow Transports testing their January highs.

From the socionomic perspective, it's also interesting to note that the SPX and Dow Industrials are testing levels from November and January - times when the U.S. was going into the presidential elections, when Barack Obama was being sworn in, and now faces increasing tests with his health care initiative and other discussions sparked by his recent press conference remarks. Again - just a socionomic note, looking at price levels and the national scene.

These factors appeared to be converging in some ways in May/June, but now have heightened with some like the SPX having matured to that .382 retrace of 962. The dollar and gold are running out of "room" in price and time to strike out in a direction. Will it be up, or down? I don't know if the charts will provide answers this week. But readers know I generally believe we shouldn't assume the big direction isn't in the deflationary direction.

It remains possible for an equities market pullback to show up and provide simply a correction working off overbought conditions. I just believe we should position in order to avoid portfolio damage in case it turns out to become something more bearish.

Oil and gasoline charts not inspiring for the bullish case in these commodities

Oil's been continuing its nice rally from the Fibonacci level I posted, but ran into moving average resistance today. You can see on the USO chart at right, this is at the 50 dma, and notice too that the 200 dma (at least on the USO chart) is still steeply downtrending. Volumes have been decent but not exceeding those on the drop. Personally, that second leg of the drop doesn't look real "orderly" to me, but that's just one element in the mix. Below is the WTIC chart - oil moved above the $64/65 level that I identified as likely resistance based on the prior broken Fibonacci level, but again there's moving average resistance. The story might not be over for oil, but $70 was stiff resistance which Tony Caldaro noted as a pivot, and the folks at Charts and Coffee blogspot also noted as chart resistance. I remain concerned that oil has much lower levels to test, so I'm continuing to tilt bearish unless and until oil makes a blatant move by pushing to, say, above $74.

Gasoline is telling a similar story, with higher volumes on the drop and more modest volumes on the rally.

(These charts are evaluated separately from natural gas, which appears to chart a course of its own.)

Double-bottom breakdown in Goldman Sachs and technical breakdowns in oil and gasoline bear watching whether correction or worse

Oil continued its drop today, and gasoline as well, while Goldman Sachs (which identified $85 as a target for oil) experienced a double-bottom breakout and dropped too. Breakdowns in these can signal consequences for the broader markets as well, so they bear watching. You can see in my charts for WTIC and UGA (an ETF for gasoline), as well as GS, below, that the drop can be corrective if support kicks in, but we cannot guarantee that at this point. I've mentioned that one target for oil can be the 200-day moving average; while in UGA, we'll see if it gets support at the .382 retracement that it just got to today, or ultimately rolls over to test lower. The large volumes on the decline make me suspect that lower levels are likely ahead. As for oil - perhaps oil could get support in a partial pullback and then move up again to test higher for the $85 level ... we'll see. Meantime, as readers know from my monthly chart, I'm concerned that the kissback to the broken channel trendline can set oil up for much lower prices. There have been news reports recently making a case for oil at $20, and I could see that in the charts, where there's plenty of chart support around that level.

The default P&F chart (at Stockcharts.com) shows a preliminary target price for WTIC at $48 (after a triple bottom breakout two days ago). Interestingly, the default P&F chart for UGA still sports a bullish target at $39.50, but acknowledges a "High Pole Warning" that triggered with today's decline. As for Goldman Sachs itself - the P&F chart shows a "Double Bottom Breakdown" today with a preliminary target at $122 (that chart is shown at above right).

My weekly GS chart below shows that its stock price tested down - again - to a downtrendline line that it broke above. Price looks like it is "stepping down" along that line, even though it is not a classic pattern line. There can be risk that the Elliott Wave count for GS completed only a bear market rally, implying a restest of its lows, but for now it's too soon to say that it's doing anything different from a correction. I had been thinking that its most recent rising wave up looked like a bearish diagonal wedge, and if that's the case then a retest of the lows should be expected, but we'll just have to let it play out some more to be more certain.

Most likely the decline in Goldman Sachs' stock price is technical, as I've been tracking it for a while and noted here that it had entered a Fibonacci retracement cluster zone, or may prove (coincidentally) to be linked in some way to the decline of oil. There have been stories that GS got involved more than passively with the price of oil, meaning it participated in some inventorying of it. And yes, I'm aware of more recent stories this week about GS involving software code, which I don't see as relevant at all for its company performance or stock price. I'm inclined to think it's more of a technical correction, and will continue to keep an eye on it from that basis. After all, it is a major component of the financial sector, so a significant move in GS alone can have a real impact on XLF and other ETF's tracking the financial sector. I've included a chart of the XLF at right - definitely a swoon, as it also lost support by moving under its 50 and 200 day moving averages.

Oil's initial move down looks consistent with rolling over to Kondratieff winter deeper cycle lows; and gasoline may follow it down

Let's check on how oil's faring since we adopted a bearish point of view on it (USO)(WTIC) - and, I'm also going to initiate review of gasoline (UGA) with this post, as well. On oil, of course readers here know that we've been measuring it for a while, including when we went bullish at the low, stepped aside on its first consolidation, and re-entered a bullish perspective until it reached a symmetry target and then started zeroing in for its turning point for trend reversal. Anyone remember what happened the day after I posted this, Psssst! Tomorrow's finally a better day to test oil's price for weakness (6/11/09)? You can always track this, and any posts here by topic, using the labels in the labels list at right. Earlier today I saw an article describing how oil's weakness during the past week might normally have been due to NYMEX futures expiring and rollover as traders not planning to take actual delivery should have been selling and rolling over to the next month; but the actual data indicate otherwise. I'm not sure if I can locate that one right now, but then there's also an interesting review in this article at Financial Ninja, The Phantom Commodity Bull Market and the Consequences (6/10/09 - interesting timing that it came out right before the high). Ben's article also draws on data and charts about the Chinese "growth" miracle in The China Syndrome (Macro Man, 6/10/09). None of these alter the point of view we've had for weeks now, but it's definitely interesting to see some more reviews of the fundamentals with insight that may explain bearish implications in these charts.

The first chart below is actually for UGA, an ETF that tracks gasoline. One of the cycles analysts whose work I follow is turning bearish on gasoline, which I've never traded before. Having an ETF available makes this accessible for many more traders, naturally. On a preliminary basis I'm going to think it's traced out a three-wave bear market rally. After all, the move in UGA doesn't look like a five-wave impulse in Elliott Wave terms - the movement is more comparable to the move in oil, which also looks essentially corrective to my eyes. I've marked off a couple of probable channels based on UGA's daily chart movements, and set up a Fibonacci retracement series from the recent high to the low. Interesting volume spike on the selling recently, and the indicators are turning. A conservative level for a pullback would of course be the 200-day moving average, which would be slightly under the 38.2% retrace, where there's also chart support based on the prior consolidation level in early May. The 50% retrace would also be a classic pullback level and it coincides with chart support at prior swing highs in March and April. Deeper than that gets to 61.8% retrace where there were prior swing lows in March and April too. If we're going to really get bearish on gasoline then we'll just look for it to retest its December lows and maybe go under them. (Interesting to consider how that would play into political and budgetary discussions!) We'll gauge the wave pattern in UGA and the indicators, assuming it does indeed continue to roll over, to help determine whether it's going to be just a pullback or something more bearish like a 5th wave or "C" wave down pointing below the December lows.

Next are the daily chart of USO, daily of WTIC, and monthly of WTIC. Looks to me like the last leg (which I consider a "C" wave) up has an extended 5th wave, which is one thing that threw us off (probably many others too) with the whipsaw in late May after it met its symmetry target and initial Fibonacci target. But then the next day it reasserted its bullish path, as I commented that day, so we backed off of course. Finally after counting a full 5 waves up, we took the bearish point of view as I mentioned with that post above. It didn't give a proper trigger confirming until the following Monday (since that next day was a Friday that only provided an inside day). Since then it's been down in both USO and the WTIC continuous contract. What's the target here? Well, maybe the similar idea of a pullback that could test down to a 38.2 or 50% retrace ... but as readers know, I'm agreeing with the more bearish idea indicated by Tony Caldaro's Objective Elliott Wave count for a "C" wave down in oil that should at least retest the lows if not go lower. My monthly chart shows that WTIC got support at its 200 month moving average, and we'd been looking for it to do a kissback to its broken channel trendline on the monthly. It did that, and even poked above it, but is poised to lose it again.

I've discussed my views of the big-picture Elliott Wave possibilities for oil, and as I mentioned I think they are in line with those indicated by Tony Caldaro. I'll be posting his weekend update soon, which focuses mostly on equities but also mentions other markets, and as always includes his chartlink (and his site is always included in the "other sites of interest" at the right side of the page here). Yes, I know that Goldman Sachs and others are still talking about oil going to $85 or $90 (and isn't it interesting that since the lows, the Goldman Sachs stock price seems to have been approximately twice the price of oil along the way? but that probably just shows I've been thinking about it too much, LOL). From a pure play chart perspective, that could happen, and even the default P&F chart at Stockcharts.com for WTIC has indicated that same target (for both oil at about $90 and for GS at about $187, again LOL). But the view of my monthly chart, and the Elliott Wave count and Fibonacci levels (together with a resistance level that Tony has at $70 in WTIC), all have me adopting the bearish point of view.

By the way, the title here is Unbiased Trading but don't be misled, it doesn't mean that we don't have points of view and that we don't trade on them. It just stands as a goal and a reminder that we arrive at these points of view based on analytics as objectively as we can, avoiding predisposition or bias. One of the big-picture analytical frameworks that I maintain for this is the Kondratieff or long-wave view that we're still in the "winter" phase, so that it's unlikely that commodities in general have completed their long-wave cycle low. So even if price were to surprise us and pop higher to that level around $85, it would still likely roll over to lower levels.