A concept I often discuss is how the primary trend of a market influences stock prices. If the primary trend is bearish, we should expect prices to cascade lower. When indices around the globe crashed to synchronized lows in November 2007, this served as confirmation that the primary trend was bearish.
As the rally from these lows has faded, some indices have broken to new lows (i.e., CAC 40 and Dow Transports) while others have refused to confirm these lows. Despite the terrible economic data and lack of clarity about how companies will navigate uncharted economic waters, the
and Wilshire 5000 remain moe than 12% above the November lows and the
is 10% above its November low.
While the possibility of a major selloff driving these markets lower remains, the large spread some indices enjoy between current stock prices and prior lows raises the possibility of a bullish non-confirmation. If the strong indices can remain above the November lows and rally to a price that surpasses the January peak, the trend will begin turning bullish.
At this point, I believe there is an excellent chance such bullish action will occur. If I am correct in assuming that markets will head higher over the coming week and turn the primary trend bullish, the recession could end within six to nine months.
As the recession ends and global growth begins accelerating, we should see inflation return and hard assets outperform. Such an expectation is the basis of this week's technical trade in my newsletter
The travails of oil are known to all investors. Last summer, people turned to commodities as they were among the only asset classes working. With press reports decrying the role of speculators driving up the cost of energy products, oil closed above $145 on July 3.
Since then, a cooling global economy, ineffective actions by OPEC and massive margin calls drove the price per barrel to $31.41 on Dec. 22 (a 78% drop in five months). Since the December low, many rallies have failed as the persistent downtrend has quelled each rally.
As illustrated in a chart that traces the peak in July to current levels, oil has exhibited a classic fan pattern. With a fan, the trend has not fully reversed until the final of three trend lines has been violated. With respect to oil, this would require a move through $65 per barrel.
While risk-averse traders may prefer waiting for such a price move to confirm that it is now safe to re-enter the commodity markets, I have seen enough positive attributes to warrant immediate action.
With a strong rally on Friday, oil prices have violated the first of three major downtrends. Further, the shares are trading above the 10-day and 50-day moving averages.
With the 10-day MA turning higher, I expect it to serve as support for a rally that should move toward the two remaining downtrends ($53 and $67). By using the 10-day MA as a stop loss order, a long position in oil offers tremendous upside with minimum downward risk.
For individual investors, the
U.S. Oil Fund
offers an excellent option for owning oil. Using oil's 10-day MA as a stop loss (currently $39.41), I recommend USO as this week's technical trade.
At the time of publication, Sean Hannon was not long. Positions may change so
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