Commodity Selloff Pressures Stocks

Equity Futures: Dow -91.00. S&P -10.60. NASDAQ -9.25. Japan Nikkei -40.00. German Dax -10.00

U.S. Trade: The U.S. market was dragged lower by the sell-off seen in the commodity market on Thursday, continuing the theme started in the European session, which saw strong declines posted by crude oil and metals. Crude oil tumbled 3% on higher U.S. inventories and is currently trading just above the $76.60 support, that has been holding the market for a month, and is a huge technical area to hold.

During the overnight session, S&P futures stayed in the red for most of the time, and although the declines were relatively small, the indications were for Wall Street to be playing catch-up on momentum at the open. The cash market spiked higher to test the 1100.00 area, but from there investors started selling the futures index heavily. The spike was caused by the better than expected Unemployment Claims and by Wal-Mart’s quarterly profit, however the pressure coming from oil and gold depreciation forced recent profit to be taken off the equity table.

S&P Technical View: TheLFB Member Charts

Daily chart trend: Long. Main price points: 1100-1120. Looking for: Wave 5 or C top

The price structure on the daily chart is showing two valid scenarios. On the left side of the chart below, it shows an impulse structure with five waves up from the 665 lows to the current highs. If this is the case, the wave 4 discussed on the weekly chart, below, will be rejected, since the fourth wave is a corrective wave, which means it cannot be sub-divided by a five wave move. However, in this scenario, a three wave push lower into a corrective blue wave 2, with a targets somewhere around 950 area is expected.

On the right side of the chart, we have a different picture, with a clear zig-zag correction, which is valid for a wave 4 scenario. In this case lower blue wave 5 will follow.

Overall, the current price structure signals for a coming turning point around 1120 area with at least three wave push lower, since the market is trading around the top of wave 5 or wave C leg.

Sector Moves: Following the sell-off seen in the commodity sector, basic materials tumbled 2.2%. In addition, every company member of the basic materials sector declined in Thursday trade, something that had a strong negative contribution in the equity market.

Despite the slow momentum seen in the equity market, some companies had an interesting trading session. One of them was Advanced Micro Devices, which surged 22% after Intel agreed to pay $1.25 billion in legal settlements. The second best gainer in the S&P 500 index after AMD was the Dow Chemicals Company, which advanced 6.8% after it said earnings might beat analysts’ expectations.

Economic Moves: During the U.S. session, investors absorbed both the weekly Unemployment Claims and the Crude Oil Inventories. Unemployment Claims came in better than expected, although still above 500K, causing a short-lived spike in the global equity markets. The report showed that claims stayed above the 500K benchmark level for the 45^th week in a row. Crude Oil Inventories came in at 1.8M, an increase of 5.8M barrels over last week, and twice the expected read, and that was a big enough miss to trigger a further sell-off in the commodity market.

Crude oil was recently trading at $76.70 per barrel, lower by $2.55.

Crude oil Technical View: TheLFB Member Charts

Daily chart trend: Long. Main price points: 68.00, and 82. Looking for: Wave V top

Oil has made the latest top around the 82.00 zone, very close to the Fibonacci resistance levels shown between 83 and 84. Volume has not been strong over the last ten days, and the MACD is showing bearish divergence. All these reads are characteristics of a wave V move, which is the final sub-wave of a black wave 1), and is indicative of a reversal set-up, in this case, short.

Gold was recently trading lower by $9.00 to $1105.60.

Gold Technical View: TheLFB Member Charts

Daily chart trend: Long. Main price points: 1026.40, and 1115-1130. Looking for: Wave III top

On the daily gold chart, the market is still searching for a wave III top before an expected bounce lower, into a corrective wave IV appears.

Currently the market is testing the 161.8% Fibonacci extension level of the wave I distance, which is a typical Fibonacci level for a wave III target. Therefore, a turning point around the current levels should not be a surprise.

Treasuries found buyers in Thursday trade, after two days in which the market had barely moved. The yield on the 10-year Treasury notes is currently 3.45%, lower by 3.4 basis points.

Disclosure: No positions

Comments

[User 402619:]

The alternative wave 5 top would be clearer if the weekly charts were posted. I think you skipped that.

Thanks for the article. As mindful and tentative as Steve Hochberg's at EWI

Nov 13 02:09 PM