Breaking Down

In recent days, markets have seen the energy driven sell off spread out into a more broad based selling pressure. After reaching a technically stretched area of the post crisis rising range (the “Death Zone” as I referred to it before), the S&P 500 was left in a precarious position, ripe for a pullback, and vulnerable to external shocks, which the sell off in oil provided. Since then, equities have been breaking down.

On the 3 minute chart, its clear that a nascent downtrend has been developing, which has pulled us down significantly from recent highs.

S&P 500, 3 minute bars

S&P 500, 3 minute bars

The selling intensified mid-morning, breaking below developing support, now turned resistance.

S&P 500, 30 minute bars

S&P 500, 30 minute bars

From the perspective of the daily chart, the nearest downside support is the 50 day moving average, coming in around 2000, and below that, the 125 day moving average around 1984. Both of these levels are now in play on a continuation of today’s breakdown. These are levels that have been significant for the past few years, but haven’t been tested outright since the September-October sell off, when after repeated tests, they finally gave way.

S&P 500, daily bars

S&P 500, daily bars

The tail wagging the SPX dog lately has of course been the energy sector, represented below by the XLE. The sell off in the crude oil complex shows no signs technically yet of forming a bottom, and the breakdown below $60 on WTI crude has opened up a whole new round of selling pressure that could potentially take it below the $50 mark. The bearish supply/demand dynamics in the market are being compounded by persistent US dollar strength, and until those conditions abate, any calls for a bottom in oil should be treated with skepticism.

XLE, 30 minute bars

XLE, 30 minute bars

So, to summarize the weakness in markets, we have:

  1. Breakdowns in the major equity benchmarks
  2. Utilities outperforming other sectors
  3. Weak commodity markets generally, led by crashing oil
  4. Strength in US treasuries, Bunds, Gilts, JGBs, etc…
  5. Strength in the US dollar vs nearly every other major currency.

Despite this bearish backdrop for stocks and risk assets generally, December is usually a strong seasonal period for risk.  We may still see a Santa Claus rally, though the odds are falling dramatically. Should the market continue to exhibit weakness though the balance of the year, it would bode very poorly for 2015.

 

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