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Oil Pointing to Market Sell-off?

Stocks have been strong, but oil prices tell a different story


The equities market is still overextended on the daily chart but the market is refusing to break down. Each time we have seen a sell-off during the past two weeks, the market has recovered.

But sellers are starting to come into the market, and it’s only a matter of time before we see a healthy pullback/correction. Volatility has been creeping up as equities try to sell off. And there will be a point when a falling U.S. dollar is not bullish for stocks, but until then it looks like printing of money will continue devaluing the dollar to help lift the stock market. Some type of pullback is needed if this trend is to continue, and the markets can only be held up for so long.

Below is a chart of the United States Oil Fund LP (NYSE: USO) and the SPDR S&P 500 (NYSE: SPY). Crude has a tendency to provide an early warning sign for the strength of the economy. As you can see from the April top, oil started to decline well before the equities market did. This indicated a slowdown was coming.

The recent equities rally, which started in late August, has been strong. But take a look at the price of oil. It has traded very flat during that time indicating the economy has not really picked up and that any growth in the coming months is unlikely.

The SPY daily chart below shows similar topping patterns. This looks to be the last straw for the SPY. Most tops occur with a gap higher or early morning rally reaching new highs, only to see a sharp sell-off by the end of the session, which generates a reversal day. From the looks of this chart, that could happen any day.

SPY Daily Chart

To sum up, overall volume in the market has been light, which is why we continued to see higher prices. Light volume typically gives the stock market a positive bias, while sell-offs require strong volume to move lower. That being said, every dip in the equities market that has been close to a breakdown seems to get lifted back up by a falling dollar, but that can only happen for so long because once the volume steps back into the market the masses will be in control again.

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