COMMODITIES HEADER

NATURAL GAS and COCOA

Long-term price chart of Natural Gas suggests that the volatile commodity is now trying to recover from historical strong support area. Over the past two decades Natural Gas (Henry Hub) prices traded as low as 1.62. There has been several instances when price reversed sharply from the strong support area between 1.62 and 1.76.

NGAS I

Natural Gas might be forming a base formation above strong support area. Possible head and shoulder bottom might be completing with the right shoulder now testing the left shoulder price level and forming symmetry. It is important to note that a breakout above 2.5 levels will confirm the H&S base formation and suggest higher levels in the following months.

NGAS II

Head and shoulder bottom and top chart patterns usually form after prolonged down/up trends. Natural gas has been in a consistent downtrend since the beginning of 2014. A similar reversal took place in 2012 after the energy price fell from 5 levels to 1.9 in less than a year. Below chart shows the base formation (head and shoulder bottom) in the first half of 2012.

NGAS III

Cocoa is another commodity that could enjoy higher prices in the following weeks/months if strong trend channel and horizontal support holds. Last one year’s consolidation has been between 2700 and 3400 levels. Price is now back to 2700 levels. While long-term trend is upwards, intermediate-term trend is still sideways. Though, Cocoa can present a low risk/reward entry around the strong support level.

COCOA

DME HEADER

DOW JONES AVERAGES and MSCI ACWI

There are discussions right now if last few week’s sell-off was another failed breakdown. Was this another bear trap? Did Central Banks again manage to put a floor to equity markets? ECB’s dovish comments and BOJ’s negative interest rate moves both came this month, after sharp sell-off in equity markets.

Due to developing bearish chart patterns and the fact that major indices are below their long-term averages I’m weighing the possibility of a correction more than a strong bull market in the coming months. This time could be different and the technical outlook might prove to be a bear trap. I’m fine with that. That’s what markets are. Current chart set-up is something that I can’t ignore and I’ll try to explain here.

First let’s look at two major equity indices that we have been following. On a monthly scale “close” was at the border. The jury is still out in my opinion. Though, I would say last week of the month we have seen a good attempt to close at the higher levels for the month.

MSCI ALL COUNTRIES WORLD INDEX III

EURO STOXX 600 INDEX III

Richard W. Schabacker in his book TECHNICAL ANALYSIS AND STOCK MARKET PROFITS (Printed in US in1932) discusses Important Reversal Formations. Under this section there is a detailed study of Head and Shoulder reversal chart patterns. We are all familiar with the Head and Shoulder chart pattern. I want to draw attention to a specific type that we are seeing right now on equity index charts. Schabacker explains:

Schabacker ISchabacker II

Here is the chart he was analyzing at the time. Please note that the original chart doesn’t include the red trend line (neckline). I added this to show the similarities with the current chart patterns.

Schabacker III

Several decades later similar chart patterns are appearing on the widely followed and traded equity indices. Dow Jones Transportation Index broke down a similar downward sloping trend line. Head and shoulder price target is at 5,800 levels, still far from current 6,906 levels.

DOW JONES TRANSPORTATION INDEX

Now let’s look at some similarities between 2008 and 2016. In 2008, Dow Jones Industrial Average reversed its 4 year-long uptrend with a Head & Shoulder top. Neckline was downward slanting. After the breakdown there was a pullback that violated the neckline but couldn’t push above the long-term average or inside the trend channel. The head and shoulder top that formed in 2007-2008 showed significant market weakness due to its drooping shoulder.

DOW JONES INDUSTRIAL AVERAGE

Dow Jones Composite Average is now forming a similar Head and Shoulder top with downward sloping neckline. Both the long-term moving average and the lower boundary of the 6 year-long trend channel is violated. If this time is not different, current chart set-up suggests a correction is more likely in the following months than the continuation of the bull market.

DOW JONES COMPOSITE INDEX III

We can also look at MSCI ALL COUNTRIES WORLD INDEX and compare the top in 2007-2008 with the latest chart development. I think the current technical conditions can’t be ignored. I want to give these markets some more time to prove the bears wrong.

 

MSCI ALL COUNTRIES WORLD INDEX IV

COMMODITIES HEADER

WTI CRUDE OIL

Oil prices are rebounding but strong resistance area remains between $32 and $40. In 2009, when oil price dipped below $40 support area, it took two months to recover back above critical level and there hasn’t been a single month of close below $40. Latest breakdown below $40 has been decisive and unless we see a rally above $40 in the last trading day of the month, this will be the second monthly close below $40.

It is highly likely that the new equilibrium will form between $10 and $40. Recovery above $40 can take longer. Possibly there  will be a lengthy consolidation and the upper boundary of that consolidation remains at $40.

Both charts are plotted on monthly scale. Each bar represents one month of price action.

WTI CRUDE OIL

WTI CRUDE OIL II

DME HEADER

MSCI ACWI, EUROSTOXX and DOW JONES

Volatility increased in the global equity markets. Last week of January will be important as we get closer to the end of the month. Why the last week of January is important? After the sharp sell-off equities are now trying to rebound. Another week of strength will result in a “close” at the higher end of monthly bars. This is the case for almost all the indices analyzed below. However, a flat or weak market action in the last week of the month will result in a “close” at the lower end of the monthly bars. A long monthly bar with a close at the lower end will confirm sellers willingness to push the markets lower. When there is an increase in volatility, it is always better to step back and look at charts with long-term focus. Preferably one or two higher degree than your usual template. This is one of the reason I’m paying close attention to monthly charts. Daily price movements can be considered “noise” in such highly volatile trading.

If EURO STOXX 600 manages to push above 350 levels, an immediate correction will be negated. However, a weak monthly close below August 2015 low (330) will suggest weakness for the coming months.

EURO STOXX 600 INDEX II

MSCI ALL COUNTRIES WORLD INDEX has similar technical outlook. Failure to push above August 2015 low at 374 levels will result in further weakness in the coming months. In order to compare all charts in this update, I added the 3 year simple moving average. You can pick different periods for the long-term average. Having a long-term filter on a chart is better than not having at all. When price is below the long-term average one should be more alert on the possibility of continued correction. In this case it is important to note that price is below several long-term averages.

DOW JONES COMPOSITE INDEX II

DME HEADER

MSCI ALL COUNTRIES WORLD INDEX

2016 started with negative performance for global equities. And weak performance can continue in the coming months. Sharp sell-off in Chinese equities mainly driven by a devaluation of the Chinese yuan, resulted in a broad market weakness. Sharp price action is making the headlines as it is one of the few bad starts for the new year in several decades. However, since April 2015 charts have been showing market weakness. (Earlier updates on MSCI ALL COUNTRIES WORLD INDEX here)

Weakness can be seen from the MSCI ALL COUNTRIES WORLD INDEX failing to breakout to new high levels in April 2015. Global equities experienced the first sharp sell-off in August 2015. Last quarter of 2015 was a reaction to August sell-off. Now, it seems like the downward momentum is picking up steam. Index is below its long-term average once again. Breakdown below the September low at 374, can send the index towards 300-350 area. MSCI All Countries World Index captures large and mid cap representation across 23 Developed Markets and 23 Emerging Markets countries. (For more information on MSCI indices) With 2,491 constituents, the index covers approximately 85% of the global investable equity opportunity set.

MSCI ALL COUNTRIES WORLD INDEX

Europe’s STOXX 600 index has similar deteriorating outlook with the index now testing a 7 year-long trend line support. In April 2015 STOXX 600 reversed from 400 levels for the third time since 2000. Failure to clear 400 during its 3rd test suggests supply is overcoming the demand every time index tests 400 levels. If we see Euro Stoxx 600 breaking down its long-term trend line support, we will expect a larger scale correction towards 300 levels.

EURO STOXX 600 INDEX

Dow Jones Composite index that measures changes within the 65 companies that make up three Dow Jones averages: the 30 stocks that form the Dow Jones Industrial Average (DJIA), the 20 stocks that make up the Dow Jones Transportation Average (DJTA) and the 15 stocks of the Dow Jones Utility Average (DJUA), is also showing weakness with a classic bearish chart pattern; Head and Shoulder Top. Support level for the index is at 5,600 levels. Breakdown below 5,600 can send the Dow Jones Composite Index towards 4,700-5,000 area. (For more information on Head and Shoulder Top chart pattern)

DOW JONES COMPOSITE INDEX