All time highs, the Russell has rocketed ahead of the other indexes, except perhaps the Q’s, but what is the risk vs reward trade here. Looking at the weekly the last 10yrs or so have been epic and in the last month and a have the $IWM has jumped from 151 to 167 roughly almost without pause.

So is this sustainable? Is now the time to go long? I say no. Could the Russel grind a little higher? Sure, but what’s the best risk to reward trade here. The daily is in oversold territory with a slight bearish RSI divergence (the weekly is looking like an even bigger RSI divergence will occur this week) and the MACD momentum is starting to slow. 

Looking at this past month push up we can see a pretty clear Rising Wedge pattern. Although it has yet to break and could still grind higher, I feel the time is now to start building a short position versus going long here at all time highs. A measured move of the pattern is 100% roughly so a target of 151 but would need to assess on the way down. 

UPDATE 6/18

The Russell reached a new high today but futures pulled back in early Asian trading after President Trump threatened an additional $200B in tariffs targeted at China. The Rising Wedge formation still remans and small caps are finding resistance at the top of the range while testing and intra day breaking support but then recovering. This is a warning sign as every time a trend line is compromised it becomes weaker. Our game plan is still in tact; sell rallies for the eventual sustained break of support for a measured move down to 1531 area for this trade pattern. Looking at the 4hr chart of small cap futures we can see a clear bearish RSI divergence meaning the strength/validity of each higher high is weakening. 

It has been awhile since we called the rising wedge formation for CL_F with a measured move target of $62. WTI has come a long way but on a weekly basis didn’t really move this week other than up and down intraday. Wags still believes CL_F has been backtesting the broken channel support, now resistance, and CL will continue down to the target price. So far CL has found resistance along the former support and reacted on its first test of the 8day. I view this week as a sideways consolidation for the MAs to catch up after an extreme unwind and now can continue down so long as the 8day acts as resistance. 

Per our trade alert, Heating oil continued down and took out trend support as we predicted. HO is about to get an 8day MA cross of the 21day further adding downward pressure.

Target one is the horizontal support at 2.15 with a second target of the larger channel support coming in around 2.05 currently but will change as time and price change. 

If support is not found there we can pull out to the weekly chart to target the macro channel. Fib levels can also act as support levels and we will have to check the indicators as we approach major levels to determine the extent of the move. 

Since we identified the Rising Wedge pattern the WTI futures have gone from the mid $72 area to a close of 65.71 Friday. Currently, CL is sitting on a trend support line in the area of major horizontal support with the 100day a stone’s throw away.

Our measured move of the pattern break is the 62-62.60 area but given the extent of the move and the converging supports a pause and retest of trend resistance is warranted and or as well as horizontal resistance levels indicated. 

 

The rising wedge we mentioned last weekend broke and like this pattern type the break is quick and big. Looking at the weekly we have a clear rising channel so a test of support at some point is not out of the question.

The measured move of the rising wedge pattern puts CL_F at $62 for that trade. Looking at the daily, CL_F ended right on the 50day and shorter time frames are more than oversold. The 60min time frame has a RSI of 7! So some relief consolidation is in order. CL is now in the box from 69.50-66.5 that it bounced around in so we could see the same type of choppy consolidation between before a push below 66.50 to the eventual trade target of $62. 

That would put CL somewhere midrange of the channel so an evaluation will need to be done there to determine if a further slide to channel support is likely or a bounce back up to the top of the range. 

I believe CL is in the process of topping. There is no confirmation as of yet though but here is why I believe so. Today we have a spinning top daily candle today with bearish RSI divergence at the moment. Looking at the Ichimoku study the tenkan and kijun have flattened out and will pull price towards.

Looking at the 4hr we can more clearly see the RSI divergence and decreasing momentum as well as a rising wedge pattern – my favorite pattern.

Given the extreme Net Long positioning in WTI Crude at the moment, this adds to the extreme unwinding rising wedges typically see already as longs scramble to cover their positions further fueling the move down. 

Now the measured move of a rising wedge is just about 100% putting a target on a break down to $62. Could we grind higher? Sure but given the move in crude YTD and a lot of geopolitical risk already priced in, the risk to reward trade as I see it currently is the short side. If you want confirmation you can wait for a break of trend support to take a position and or add to it on a back test of said trend line if it happens. 

Crude is a highly manipulated commodity and nothing is for certain so use stop losses and be willing to accept the pattern is null if price and indicators are telling you so. In other words, you don’t ever want to marry oil, just date it. 

As if the potential setup wasn’t enough, an hour ago numbers came out of Japan that showed the economy shrank for first time since 2015. The Nikkei futures have had a huge run from the lows 3/26 as seen on the daily chart below. A week ago the NKD broke channel support and has been sliding along the underside which is now resistance and today we have a new daily candle on the other side of this channel support. 

If we look at the 1hr of the past few days there is the potential of a Head and Shoulders pattern with the slope at 22680. The trade setup is a short with a SL slightly above the the right shoulder at 22800. The target profit is a measured move down to 22450. 

The bullishness continued today and the $SPY paused right on the highs resting against the downward trend line. The ETF which tracks the S&P 500 moved through horizontal resistance and is now above all major moving averages. 

The E-Minis futures contract actually pushed slightly above its trend resistance and has a new daily candle on the other side. Both the RSIs are confirming the new higher highs so it looks like a test of the 280 for the SPY is in the cards.

The resistance levels before 280 for the SPY are 273.42 (the 61.8% Fib retracement) and 279.14 (the 78%). A small backtest after pushing through resistance or of the 100day would not be unexpected but also not necessary. 

With Gold falling out of favor with the rest of the precious metals as the US Dollar breaks out of consolidation to the upside, I thought now would be a good time to take a look at one miner in particular to put on the radar for a long position in the near future. 

Barrick Gold ($ABX) engages in the production and sale of gold and copper, as well as related activities such as exploration and mine development. 

With a decent run since March and a pullback likely coming I’ll be watching for signs the correction is complete around the $13-$11 range to enter a long position. 

So why take a look at the miners with Gold prices under pressure lately? Lets take a look at the valuations of a handful of major miners. The chart below plots the median enterprise value-to-revenues for major miners over the past 20 years. Notice that from a valuation standpoint they are cheaper today than it was in the early 2000’s when Gold was hitting $1,000 spot price. 

It also looks as if the profitability of these companies is significantly better today than it was roughly 15 years ago when Gold prices were much higher. 

Furthermore, the median 3-year revenue growth for this group has just turned positive again as it did at the start of the last major bull market for gold and the miners.

All in all, it looks as if Mr. Market is currently pricing in a much more dire situation than the companies actually face at present. In other words, this is what a margin of safety looks like. A normalization of the valuations for this group would yield a 50% gain for the stocks even without any upside in the gold price.

What a week. Just when we thought the market was breaking down it found support at the 200day MA not once but twice and on Friday’s test the SPY then reversed and pushed through both the 8 & 21day’s MAs; pausing at a short term trend resistance. 

We finished with a weekly reversal doji candle. It would be difficult to argue that the near term is not bullish with the 200day holding, the weekly candle and the daily solidly up all day through the 8 and 21 MAs. 

But that is now the past. What about next week? I can see a few likely possibilities.

  1. We push through the downward trend line resistance and continue up to a convergence around the 170 area and or trend resistance. I feel given the strength of the move Friday this is the likely the case. 
  2. Something geopolitical happens over the weekend and the SPY reverses  as it finds resistance at the 50day and the 267 horizontal resistance. All things being equal this is a possibility but I feel has a lower probability of occurring. 
  3. So is the first scenario plays out and we continue up into the next resistance areas, those are the 170 area, the 100day MA and downward trend line. If we find resistance there the SPY continues down to test the 200day or triangle support.
  4. It that resistance doesn’t hold, we continue up and test the open gap at 280.

These scenarios my seem simplistic (either we go up or we go down) but I assure you, I haven’t seen the Bull and Bear cases so equally matched and both sides will be fiercely defending their positions. 

What is my personal feeling of what plays out and would like to see happen? That is a complex question. I do not want to see the market suffer a 40, 50 or 61.8% correction and people feel the pain that comes with that. I’ve been through it and its not fun. People lose jobs and retirement accounts. But do I feel that a continued correction is the best thing for the VERY over inflated market propped up on quantitative easing since 2001 and historic central bank debt levels… Yes. 

If we were to test the highs again without a more meaningful pull back than the 10% we had in February, the danger is a much more severe and prolonged period market turmoil if we test the highs now. It is a lot to go into here but without a resetting of the in-balance of capital and debt markets (in short) the global economy simply cannot continue fueling the market through ‘easy money’ infused into the global economy. Their balance sheets are at historic levels and are already in the danger zone. Continuing adding to these levels would run the risk of not just a correction and recession but a full out depression worse that 1929. Now this is not a certainty but rather a very real possibility noted by Economists and Financiers around the world at the moment.

So would I prefer a little bit of bullishness to test the highs and a possible double top, or would I like to see the markets reset now for a more prolonged period of expansion? I choose the latter and why I would like to see resistance hold and see a continuation of the correction down to a total of 30-40%.