We had all the makings of a “turnaround Tuesday” in the stock market yesterday. We had a big decline on Monday…that was followed by more downside movement Tuesday morning. Then, we got a very strong/sharp rally midday…and all of these moves (including the big drop on Monday) came a VERY strong volume. This is exactly the kind of action we tend to see when the stock market is going to see the kind of bounce that will last for several days (if not several weeks). No, the drop on Monday and early Tuesday morning did not have the kind of extreme negative breadth that would signal the kind of washout move that would indicate that THE ULTIMATE bottom for this move has been put in place…but it still had all the makings of a bounce that would last for a while.
However, the bounce ran out of steam. (From what we can gather, the chatter around the Street says that the strong midday rally was fueled by reports that Ukraine President Zelenskiy decided to give-in on the issue of NATO…and say that Ukraine would not try to that organization. However, reports that the Biden Administration put the kibosh on that strategy by Zelenskiy…turned the market back down again.)…..Whatever the reason, there is no question that we saw a strong rally…and this the rally did fail…leaving the broad averages very near their lows of the day by the close.
THAT SAID, the futures are pointing to a much higher opening this morning. So, now that the above geopolitical rumors are off the table, maybe the market CAN rally in a more meaningful way …and the “turnaround Tuesday” will merely be delayed by a few hours……One development that could help this scenario come true is the drop in crude oil. WTI…which traded up to/near $130 on both Monday and Tuesday…has now fallen slightly below $120. This 8% decline still leave the crude oil 3% higher on the week, so we’re not trying to imply the worst is over in this rise in energy prices, but an 8% drop is still a big one…and it sure seems to be giving the stock market some much needed relief this morning.
As we have been saying a lot recently, crude oil has become EXTREMELY overbought on a short-term basis. Its daily RSI reading moved above 86 at one point yesterday…and its weekly RSI has moved above 83. These are the most overbought levels we can find…going all the way back to 1983! (Yesterday, they moved to slightly more extreme levels than we saw in 2007 and 1999.) Also, it’s weekly Bollinger Bands chart reached it most extreme level that we can find as well. Therefore, crude oil has become ripe for the kind of material pullback that will last for more than a day or two.
Of course, technical analysis can sometimes be thrown out the window when geopolitical issue come into play. Therefore, crude oil prices could spike higher again at any time. However, the oil market seems to be engaged in a “buy the rumor, sell the news” reaction to the Biden Administration’s decision to ban Russian oil imports. Therefore, if (repeat, IF) there is no new-news on this front over the next few days, crude oil could/should see some more downside follow-through…given how extremely overbought the commodity has become this week. (Chart attached below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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