Two Worst Markets in Any Time Frame

11/05/2014 10:40 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

The stock market has had sharp gains from the October lows but investors in two markets have been hit hard and MoneyShow's Tom Aspray takes a technical look at these markets to see if investors should now consider buying.

The stock market succumbed to some light profit taking early Tuesday as it opened lower with most of the major averages hitting their lows just before lunch. Only the Dow Industrials and Dow Transports closed a bit higher on the day.

The S&P futures and the Spyder Trust (SPY) closed Tuesday below Monday's doji lows triggering daily LCD sell signals. A move above Monday's highs at 2019.25 and $202.45, respectively, is needed to reverse these signals. The market internals were slightly negative as the McClellan oscillator has dropped to +108, which is down from its recent high at +269.

The S&P futures showing nice gains in early trading as are the EuroZone markets with the German Dax and Stoxx 600 both up over 1.5%. Of course, it is the close today that is most important with the ADP jobs report out early and then the monthly jobs report on Friday.

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The biggest losers Tuesday were, again, the Sector Select Energy (XLE), which was down 3.6%, with the Market Vectors Gold Miners (GDX) down 3.9%. In an interesting WSJ article, Howard Silverblatt at S&P Dow Jones looked at how much of a drag the energy sector has been on the S&P 500.

The article reports that, on Monday, the S&P 500 would have closed at 2058.36 instead of 2017.81 if it wasn't for the drag from the energy sector. The key question for investors, of course, is how it will ultimately impact the current stock market rally?

As I had pointed out in early October's How Low Will Oil Stocks and Crude Oil Go?, the technical and seasonal analysis favored lower prices. The December crude oil contract has lost almost $10 per barrel since then. According to Commitment of Traders (COT) expert John Person, "12% of the small speculators are still on the long side of crude and they are often wrong."

A look at multiple time frame analysis on crude oil, gold, and the gold miners can help investors determine what strategy they should use on these key markets.

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Chart Analysis: The weak monthly close in the crude oil futures was expected several weeks ago as it closed well below support at line b.

  • Crude oil closed the month below its monthly starc- band last month.
  • This is one of the few positives with the weekly band at $74.08.
  • The volume increased sharply last month as it has been rising for the past three months.
  • The OBV tested its declining WMA in June (point 1) as prices were moving higher.
  • This was a classic AOT sell signal and the OBV has dropped to its lowest level since 2010.
  • The monthly projected pivot support is at $70.79 and the $70 area is thought to be a key level for domestic oil production.
  • The completion of the trading range (lines a and b) has initial downside targets in the $60-$64 area.

The daily chart of the December Crude oil contract shows the completion of the trading range in early October as support at $89 was violated.

  • Crude stayed below its monthly pivot in both September and October, which was a sign of weakness.
  • On the daily chart, crude oil had been forming a short-term continuation pattern that was completed Tuesday when support at line d was violated.
  • The volume was very high on October 14-15, which marked a short-term selling climax.
  • As prices moved sideways, volume declined but has picked up on the recent decline.
  • The OBV tested its declining WMA last week (see arrow) before prices plunged.
  • The on-balance volume (OBV) started a new downtrend in early August.
  • The pattern of lower lows in the OBV (line e) is consistent with a solid downtrend.
  • The daily starc- band is currently at $75.21.
  • There is initial resistance now in the $79-$79.50 area with the declining 20-day EMA at $81.82.

NEXT PAGE: Two More Key Market ETFs to Watch

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The monthly chart of the SPDR Gold Trust (GLD) shows the October close below the key support at $114.46.

  • The quarterly projected pivot support is at $107.06 with the monthly at $106.09.
  • The monthly starc- band is at $104.38 as GLD closed below the daily band on Tuesday.
  • The Demand Index dropped just below support, line a, last month.
  • The DI has broken its downtrend in June but has stayed below the zero line, so the selling pressure has stayed greater than the buying pressure.
  • The OBV made new correction lows last month and is now approaching the more important support, line c, from 2010.
  • The WMA of the OBV is still declining and the weekly OBV (not shown) is also still negative.
  • There is minor resistance now at $114-$115 with the declining 20-day EMA at $116.50.

The Market Vectors Gold Miners (GDX) closed last week on its weekly starc- band as GDX is down over 33% in the past three months.

  • The monthly starc- band is at $13.55 with the monthly projected pivot support at $13.48.
  • The completion of the continuation patterns, lines d and e, has downside targets in the $9-$10 area.
  • The Demand Index violated its support, line f, on September 12, when GDX closed at $22.66.
  • The DI made further new correction lows last week and is in a clear downtrend.
  • The weekly OBV broke its support, line g, at the same time as the DI.
  • The monthly and daily OBV have also made new lows with prices.
  • The volume over the past four days has been almost nine times the daily average.
  • There is initial resistance now in the $18 area with the declining 20-day EMA at $20.41.

What it Means: The sentiment on both crude oil as well as gold and the gold miners is quite bearish, and while these markets are oversold, there are no signs yet of a bottom.

The completion of the continuation patterns does allow for a rebound back to the breakdown levels but think we will get further new lows first. The starc band analysis does allow for some consolidation over the near term.

The energy sector ETFs have not yet made new lows but also still look negative technically. The relative performance analysis of the energy sector still indicates that it is underperforming the Spyder Trust (SPY). Therefore, I think it is too early to buy the energy stocks.

How to Profit: No new recommendation.

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