Our market analysis is simple yet thorough. Readers know by now that we consider chart analysis, fundamentals, sentiment and intermarket analysis as the pillars in our methodology.
Interestinly, intermarket analysis shows that markets arrived at an incredible junction. Let’s put it another way: new and strong multi-month trends are about to emerge very soon. The next big moves are near, it is a matter of weeks.
While 2015 was a boring year for most stock markets, the coming 12 to 18 months will have clear trends, without any doubt. How comes we are so sure? Look at the following intermarket charts.
First, the S&P 500 is at a make-or-break level. While the recent break below the 200 DMA was significant, and created technical damage, the index is still able to repair this damage by breaking to all-time highs. The bearish case, however, is that the index will fall below its 200 DMA again, which will probably signal a new bear market.
It is important to note that the bulls have the benefit of the doubt, as during the consolidation period (indicated with the red rectangle on the chart), there is a chart formation of higher lows.
The number of stocks in the S&P 500 above the 200 DMA is at ‘neutral’ levels (readings around 50). Below 50, the stock market is in a downtrend or correction, while above 50 points it is in an uptrend. Market breadth has been weakening in the last 12 months, so bulls would need to see an advance to all-time highs with strengthening market breadth.
The Japanese Yen is testing multi-decade support levels. A weakening Yen is known for stimulating stock markets. A fall below the 80 level would be an intermarket confirmation for a continuation of the stock bull market.
The dollar index is also hitting its multi-decade trendline. According to the next chart, it has broken out in October of this year. A stronger dollar is not necessarily ‘bad’ for stocks, but it does not help commodities and precious metals. Although there have been periods in time where the dollar and commodities have risen simultaneously, it remains to be seen how commodities and metals will react on continued dollar strength.
The commodities index shows, in any case, that a multi-decade support level is reached in November of this year. If support does not hold, we will end up in a strong deflationary environment, which, combined with continued dollar strength, will keep all assets down. On the other hand, a rise of stocks and commodities on a rising dollar would signal a strengthening economy, similar to the 2003 – 2006 period.
These are exciting times, and clear trends will arise very soon. Watch the levels that are highlighted on the charts in this article for clues on the direction of all markets.