Three Quick Bites from Boston

This post has nothing really to do with food, except my Uber driver this morning was from Brazil. He was telling me all about Brazilian delicacies such as coxinha and pao de queijo and by the time we arrived at the hotel I was pretty much starving.

But three quick market/behavioral observations to share with you on a Wednesday…

First, I wrote recently about the very long-term view of the S&P 500 and how technical analysis on this time frame tends to be more descriptive than predictive.

The 10-year rate-of-change indicator shows how the current configuration relates to previous bull/bear cycles, and how the data dropping off from ten years ago is set to propel this indicator to more bearish levels.

Second, I related the emotional reactions we often have during market drops to my own emotional reaction when I thought I had lost my credit card during a recent trip to Malaysia.

A heightened emotional state is a very human way of reacting to disruptive events. But that is usually not the right state of mind with which to make investment decisions.

No emotions necessary. Just look at the chart.

By focusing on the evidence, such as a clear sector rotation from offense to defense, we minimize the impact of our emotions on our decision.

Finally, as I start preparing for my presentation at the Inside Commodities 2018 Conference in Denver, I feel compelled to address the rapid selloff in crude oil.

Oftentimes, charts will have a nice, clean rotation from a period of accumulation to one of equilibrium to one of distribution. The chart above of Consumer Discretionary vs. Consumer Staples sort of shows this rotation.

You have the accumulation phase, where the ratio is showing a clear pattern of higher highs and higher lows. You then have an equilibrium phase where the trend is sideways and the two sectors were fairly stable in relationship to each other. Then we have a distribution phase, with a clear pattern of lower highs and lower lows.

No equilibrium phase in sight…

You could argue that the last six months on the crude oil were a sort of equilibrium phase, with $75 serving as a resistance level for that range. But I saw this is a continuing pattern of higher highs.

The recent selloff was sudden and decisive, all but skipping the equilibrium phase in a clear distributive pattern.

From a trading perspective, I would say that crude oil has retraced 61.8% of the 2017-18 rally, which often serves as an area of price support. This coincidentally lines up with the price high from early 2017, so we have a confluence of levels.

From a long-term perspective, note how the RSI has become extremely oversold (below 20). While this could indeed be a capitulation low, when a market becomes extremely overbought or oversold, it usually means we’ll see a brief respite before a continuation in the original direction.

To put another way, the momentum is so negative and the herding is so powerful that any up move will just give another opportunity to any bears that missed this first leg down.

As always, wishful thinking is never a good investment strategy. I choose to rely on the weight of the evidence and will let the charts tell me which way to be positioned.


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