As I've been writing for the last several days, the market continues to look vulnerable in the short-term. The recent rise has been met with developing negative divergences and other non-confirming red flags. For example, note the following chart:
The S&P 500 (red line) has made a new high but the Russell 2000 Index (green line) has not, a non-confirmation and establishing at least the start of a negative divergence. Also note the MACD is rolling over, exhibiting bearish-divergence tendencies similar to that in late July-early August.
Moving on to crude oil, and speaking of divergences, the commodity continues to move in the opposite direction of energy equities. Needless to say, this price action is highly unusual, as shown in the chart below.
The rolling 3-month correlation between crude oil (WTI) and energy stocks (XLE) is currently an astonishing -0.84, the lowest Coefficient since the inception of the XLE. Wow. The correlation between energy equities and their associated commodity has generally been positive with the rolling 3-month Coefficient usually well north of zero. I have to believe this relationship will soon revert to norm as it has in the past when the correlation has become negative. I'll repeat again that in my experience equities tend to lead their associated commodity and as shown in the chart above, the XLE (black line) remains in a nice uptrend despite the recent decline in crude oil (red line). That said I continue to expect crude oil to remain in its longer-term uptrend and eventually break higher.
In fact, the chart above shows that crude oil is currently at an inflection point with the rising trend line meeting a shorter-term descending trend line, forming a triangle.
Further serving as a tailwind for crude oil is my bearish take on the USD (see here and here). Crude and the USD tend to move in opposite directions and I continue to interpret the above chart of the USD as bearish. As I've pointed out before, note the complex head-and-shoulders pattern (red circles) including the breached neckline in September at around 81. The more recent snap-back rally to the neckline is fairly common behavior post-neckline breach, often followed by price rolling over. The USD is also currently facing dual overhead resistance via the neckline and the declining trend line (blue). Stay tuned.
Finally, as I anticipated, the Nikkei recently broke to the upside, successfully emerging out of its pennant formation. As previously discussed, pennants and flags are continuation patterns, meaning they typically develop within an existing trend and the next move in price is more often than not in the direction of the existing trend -- in this case, up.