Last week went exactly as we expected. Bulls had become tired and Bears were finally able to strike. This week we should see bulls attempt a bounce early in the week. We have a micro double bottom with a 236 target. The Bears however, still have gravity on their side so we will consider shorting any bounce for a second leg down. The bottom line is: Bears should be able to breach the 232 trend line and make a run at the 230 target over the next 2 weeks.
If March can close near the low of the month, we will start to anticipate 2-3 month 5% pullback. This pullback will likely test the 2017 open around 224-225. This time frame should also coincide with the anticipation of the upcoming French elections this April and the debt ceiling and tax fight in May and June. With the recent strong bullish move, The Bulls have bought themselves more time. The Pullback will almost certainly be bought and the market will attempt to at least retest the highs later in 2017. At that time it will be the next real chance to see a stronger Bear emerge.
228 is the first line that The Bears need to break to be taken seriously.
Volatility has become very low over the last few weeks. This is signaling things are too complacent. Couple this with very high bullish positions, and Bears could make a large stop run with little warning which we saw happen last week.
As we have mentioned, long term yields on bonds have begun to act differently than in recent years. This could be an issue if yields keep on rising. As we expected a short squeeze started a few weeks ago fueled by mandatory fund re-balances. Leg one of the squeeze has completed. Look for a second leg coinciding with the coming market pullback. We also now think the end of this Bull market will coincide with the 10 year yield around 3.5%.
We are keeping an eye on Crude. Smart money is currently extremely short. The last time this happened was when oil crashed in 2014. So we could see up to a 40% retrace of the gains made since the February 2016 low. This would put Crude into the lower 40s and would ultimately put extra pressure on the overall market.
Long-Term Market Outlook (Updated 1/1/17).
The 2400 target was fulfilled. This was a great area to take some profits off the table, and we should normally see a pullback here.
This week we will have a parade of Fed speakers and the GDP report.
Next week we will have the FOMC minutes and the Employment report.
Trend Following Models:
Our long-term models are Bullish.
Our medium-term models are Bearish.
Our short-term models are Bearish.