At this time when coronavirus cases have topped one million worldwide, investors are trying to figure out what is next for the stock market. This analysis just became more complicated due to huge moves in crude oil that should be considered dubious. given that demand for crude has fallen off the cliff due to coronavirus shut downs. There is a strong correlation between crude oil and the stock market. If that was not enough, there are anomalies in the jobs report.
Under these circumstances, it is important for investors to figure out what really matters and what does not. Given that dubious oil rally and anomalies in the jobs report, stock-market rallies should be used to raise more cash based on the protection band criteria (more later in this article), and rallies should be used to build protection for long-term portfolios. I have previously written that the stock market’s rally has a 65% probability of failing. Let’s explore with the help of two charts.
Two charts
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, which tracks the Dow Jones Industrial Average DJIA.
Please click here for an annotated chart of crude oil futures CL00, CL.1. Investors who are not comfortable with oil futures may look at an oil ETF like the United States Oil Fund USO.
Note the following:
• The first chart is a monthly chart to give investors a long-term perspective.
• The second chart is a 15-minute chart to give investors a very short-term perspective.
• The stock market was showing all of the telltale signs of falling and testing the old lows when President Trump stated that Saudi Arabia and Russia would cut 15 million barrels in crude production as shown on the second chart. There was first a report from Russia of denial of any deal and then a report from Saudi Arabia stating that Trump had exaggerated. The second chart shows oil retreated on the reports from Russia and Saudi Arabia.
• The second chart shows that oil was retreating further when the news came of an OPEC plus Russia meeting. It also shows aggressive buying in oil by the momo (momentum) crowd on the news.
• Stock-market futures were substantially down on coronavirus cases crossing one million but were pulled up by a very strong up move in oil.
• The first chart shows that RSI is nowhere near the last major bottom. This indicates there is room for the stock market to fall further….Read more MarketWatch.
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