Technically Speaking For January 24

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Includes: SPY
by: Hale Stewart
Summary

Several parts of the belly of the yield curve have inverted.

Although oil prices have rallied from their lows in the lower 40s, technical and fundamental reasons support the idea that prices will remain in the mid-50s for the near future.

The SPY was near unchanged.  But so far, there is still plenty of bullishness below the surface.

One of the main reasons I've got a 25% recession probability in the next 12-18 months is the inverting yield curve. These two charts add the appropriate color to that prediction: The 5-1 year spread contracted earlier this year. It has since moved back above 0, but only slightly. The 7-1 spread dipped marginally below 0 earlier this month and is now positive by a few points.

Oil prices have rebounded:

After falling to an absolute low of 42.36, prices rebounded to the lower 50s, an increase of about 25%. They are now coalescing around the 50-day EMA and 38.2% Fib line - a fairly standard technical development. The shorter EMAs indicate the short-term trend is higher, which is supported by the rising momentum. Even if prices move through resistance in the lower/mid-50s, there is plenty of technical traffic above to keep prices in this area for some time. Add in the fundamental picture (i.e. weaker demand from a slowing global economy and a supply that so far is unconstrained by the reimposition of Iranian sanctions) and you have a good argument that prices will stay around this level for some time.

The ECB maintained their interest rate policy at this week's meeting. Here is their analysis of the current EU economy (emphasis added):

Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. Incoming data have continued to be weaker than expected as a result of a slowdown in external demand compounded by some country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, lower energy prices, and the ongoing – albeit somewhat slower – expansion in global activity.

The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.

Recent EU data has been bearish, which is why I recently wrote "It's Time to Worry About the EU." Today's Markit PMI release - which contains the lowest readings for the manufacturing, service, and composite indexes in the last 5 1/2 years -- adds to the concern.

Let's take a look at today's performance table: The good news is the indexes were modestly higher. The bad news is there was a wide range of performances. The transports along with smaller company averages were higher. The SPY was near unchanged.

Once again, let's look at the analysis a bit backward and start with the daily chart:

Prices hit resistance at the 200-day EMA on Monday and have since been consolidating at the 50% Fib level. The shorter EMAs and the MACD are rising, indicating an upward trend over the short term.

The two-week chart clearly shows this development. There's a nice symmetrical triangle pattern right above the 200-minute EMA.

The daily chart shows a fair amount of bullishness:

On three separate occasions, prices moved higher, indicating the market has a pretty strong bid.

On balance, a consolidation after a gain is a healthy technical development. The fact the other indexes have rallied means the SPY should continue with the advance.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.