The Shrinking Herd

The beginning of a new post-Federal Reserve meeting week was upon us, and stocks responded positively to the absence of interest rate hikes. The Dow Jones Industrial Average grew 0.77% and the S&P 500 showed similar small gains as it grew 0.46%. The VIX volatility index showed a -9.61% drop perhaps showing a reduction in bearish over the rickety markets, but there is no doubt investors have been trading over a down trend. Even with market gains and a major decline in the volatility index, I can't help but feel a grayish overtone fall upon the market. While the S&P 500 showed those gains, the volume level reached a monthly low which is half the amount of last week's close. Trading activity is most likely muted by the fact that the Federal Reserve saw enough of a poor outlook in the economy that they thought interest rate increases would hurt the economy. No one wants to be told they need a handicap for a game to be fair, and that's just what the economy was told. Why is the market trading in a downtrend? The Fed can't project an inflation level of 2% until 2017. Labor markets are just now staggering to acceptable levels. These were the same issues that investors contemplated as they traded into the volatile period before the correction. They traded scared with low volume. Overall Dow levels shouldn't approach its long-term 200-day moving average for a while with bearish sentiment holding any breakouts below that trend line for at least a year. The sector that will be leading the downtrend, energy, might become a barometer for recovery as the Fed goes forward looking to raise rates. The glut continues and prices remain at the lowest they've ever been with no end on the near horizon. Although, a report published by Wood Mackenzie cited that "up to $1.5 trillion worth of oil and natural gas products are in danger due to price slumps." On this report and bets that production declines would continue into the end of the month, WTI crude saw an increase of 4.5% after its plunge on Friday. Brent saw similar gains at 3.1%. Nevertheless, the Federal Reserve's decision still questions demand and growth that typically boosts production annually. For that reason, we'll see a mediocre performance from the S&P Energy Index (+0.57%) and the Dow Jones Global Energy Index (+0.09%) showing the pains that investors feel from demand data. Looking at sectors, that of energy will be slower than 6 other sectors that gained today at a measly 0.32% even with Dow and WTI gains. So what can we expect from oil prices in this post-correction, post-interest rate hold market (because both are still looming over our heads)?

Once again like many times on this blog, we've got WTI's three-month chart showing the end of the summer and beginning of fall data. The shape encaptures the long summer plunge, the stock correction, and the volatility of recent. Now, we are stuck in a period of whipsaws that have made profits hard to maintain and driven volume down. The Relative Strength Index signals a trading environment just like that as supply and demand pressures wind down into a triangle pattern. Typically, triangle continuation patterns stall a trend for a certain amount of time before it resumes as well as marking the halfway mark of the movement. This particular shape appears to be more of a bullish flag with the angle of gains being larger than the losses, but that activity is supported with decreasing volume from the ADX indicator on the bottom. Volume levels reflect the weakness that was shown during the bearish wave in July in which earnings reports and increasing production produced immense pressure on a lowering benchmark. Here, the herd looks pretty weak which reflects the market trend of exhaustion that threatens bullish sentiment. On top of that, the MACD indicator shows a smaller and smaller spread, threatening a key crossover moment that could generate a lot of sell signals. What might be hurt most are the oil ETFs that bet on bull and bear runs in the near future. Look for UWTI, OIL, and UCO to have muted movements as the week goes on. Another important thing to notice is that prices are currently hovering around a 50-day average that looks to define a monthly trend. Breakouts in either direction could mark the creation of important crossover points that signal a trend continuation of a countertrend. A bearish reversal would have to surpass the support line around $43.00 to mean anything. Right now, technical indicators show ambivalence in what way to trade, but supply fundamentals could resolve any confusion. With production declining week-by-week and further projects endangered by a dearth of extra cash, fundamental forces look to be pushing investors to make bullish bets, but they have to be there to make them if they want the price to move. Another lever to keep in the back of your mind is that held by OPEC. Fledgling members are demanding a production cut, but the Saudis haven't given in yet. The hollow end of 2015 will bring about more global emerging market issues on that front still to be resolved on OPEC's international stage.