Editor's note: Following is an edited version of commentary Ken Goldberg sent to readers of his WaveBOOM subscription email newsletter Tuesday night.
NEW YORK (TheStreet) -- There is big debate right now about whether the major stock indices have reached a peak, as the Federal Reserve is now posturing that it will raise interest rates.
However, the market began raising the yield on the 10-year Treasury note in July 2012, from its all-time low near 1.39%. It also raised the yield on the 30-year Treasury bond from its all-time low near 1.65% this past January, after 34 years of decline. (See the chart below.)
Therefore, a stock market peak and reversal should not be blamed on upcoming Federal Open Market Committee actions. Rather, such a reversal in stocks should be blamed on the market's realization that the Fed has lost control of interest rates and is catching up to the crowd's belief about reality: a higher interest rate environment.
Tuesday, right on the target date of the major Bradley Model market turn date, stock indices opened lower, then reversed higher, closing well off their lows.
So, either a short-term low is being manifested, or, since major Bradley Model turn dates have a margin of error of plus or minus two days, there is still a major reversal coming, which could be from a lower high occurring later this week on the back of the bounce that began Tuesday.
Evidence of at least a multiday bounce comes from a short-term buy signal on the S&P 500 that appeared at the close Tuesday on the Chicago Board Options Exchange Market Volatility Index, or VIX, a widely used measure of stock market volatility. The VIX closed back within the upper Bollinger Band. The other two times this occurred this year, rallies followed.
Also, the McClellan Oscillator closed Tuesday at -188, which is in the vicinity of oversold extremes that should be harbingers of market lows, at least temporary ones, in the next couple of days.
The McClellan Oscillator measures the direction of money flowing into or out of the market, on a net basis. At -188, money is flowing out of the market at an unsustainable rate. As that outflow wanes, a bounce in stocks follows.
Daily stochastics on all indices, except the Russell 2000, are at oversold extremes, as well. Therefore, those with profitable shorts are urged to protect them with trailing stops, or simply close them out for now.
If stocks have one more new high left in them, 18,500 on the Dow and 2150 on the S&P 500 are ideal for termination targets. New highs are not required, however, and current divergences are historic.
Following are forecasts for futures contracts on major commodities and the euro. Please note that prices are on so-called "continuous contracts," which often, but not always, are front-month contracts.
Natural gas is rising rapidly this week, and if $2.60 holds in any coming correction, $3.60 should be seen. With daily stochastics crossed "hard up," it looks like the commodity may pass the May peak of $3.10 sooner rather than later, with even more bullishness to follow.
Crude oil has likely finished correcting its initial test of $63. Next, it should attempt the $68 (plus or minus 2) resistance from the late November breakdown.
The euro is back to overbought daily conditions, but the currency has the ability, if weekly stochastics cross back up, to stretch (sooner than later) toward $1.18, plus or minus 2 cents. Otherwise, breaking under $1.08 means a swift retest of the 2015 lows in the $1.04 area, which likely means a probe of parity with the greenback this year!
Metals are at oversold levels that are seldom seen, with the Daily Sentiment Index (courtesy of trade-futures.com) readings of only 12% bulls (in silver), as of last Friday's close. But even though the daily stochastics are oversold, the weekly stochastics are in "hard down" formation, and the larger pattern is more bearish than bullish. Investors should stand aside until these various trends align in a clear opportunity to go long.
Soybeans continue to rise off the May lows but are presently doing so in a corrective formation. The good news is that weekly stochastics are crossed up now, giving intermediate term support to prices -- likely throughout the summer. However, daily stochastics are overbought, so 860 should hold back further testing in the short term. Only an impulsive break to more than 985 will warn that the lows are in, and that "crop stress" is about to be worse than the crowd expects. Then, 1200, plus or minus 50, is well within the realm of the coming six months. We can't predict that the crop stress will be due to drought, flooding, or something else; only that some news event is likely on the horizon that scares the crowd into bidding up prices.
Corn remains similar to soybeans, except its corrective pattern from the early January high is a less damaging one, thus making it a relatively stronger market. It should see 480, plus or minus 40, if crop stress arrives. Corn has appears to have impulsive action off its May low. So, if 355 holds any near-term decline, 395 is the next meaningful resistance level, before the upper 400's are potentially challenged, into late Summer or Fall.
Wheat has a pattern that is dissimilar from these other two, making short-term analysis and forecasting much harder. However, stepping back to look at larger market patterns, there's the probability of 710, plus or minus 40, if the other two in this complex reach for their upper target levels (given above). Although these upsides might get your greed juices flowing, it's wise to await pullbacks as just listed.
Cotton's weekly stochastics are now crossed up, which is potentially bullish. The beauty of the Decision Support Engine at Trading With Waves is that one indicator does not a buy or sell signal make. Pattern recognition rules, and the pattern here is anything but impulsively higher. So, we'd stand aside, and consider shorting a break of 63.
Sugar is as oversold as it's been since both the 2010 and 2007 lows. Yet only liquidation action has been seen since this year's break of the 2014 low and then the break of the 2010 low, both of which were in the 13s. This implies a break to new lows under the late May test of the extremely high 11s. However, conditions are so oversold that the Decision Support Engine warns not to be a "late joiner" of a terminating trend. Therefore, shorting is not optimal here. Rather, getting long on a break above 12.50, and adding above 13.50, is the more prudent play.
Coffee has really spiked off the May test of the lower 120s, which likely provided the best buying opportunity since late 2013. That test of the 123s has yielded the current probing of the upper 130s, and in arguably impulsive fashion. As long as 130, plus or minus 1 holds any consolidation, the Decision Support Engine reminds investors that the weekly stochastics are now in crossed-up conditions, telling us to be long for the 160's, with more bullish potential thereafter, toward 180 into year-end.
Cocoa likely caught some late-joiners in a "bull trap" above 3100. We can't rule out another poke above 3175. But a break of the 2015 lows near 2700 would be a better-shaped pattern to buy into. Patience is suggested.