Weekly Market Wrap: 3 May 2013 – Oil forms second tradable pattern while Japanese and US equities continue to power higher

This regular column reviews the condition of several different markets. This week’s column examines the chart pattern that has formed in crude oil, the best performing sector in the S&P 500 (the financials), and the powerful uptrends that exist within the Wilshire 5000 and the Nikkei.

Commodities

WTI Crude Oil

The 5 April market wrap drew attention to a triangle consolidation pattern that had formed on the daily chart of WTI (West Texas Intermediate) crude. Back then it was clear that WTI would break out of this pattern sooner or later and that the move would likely have significant momentum, however, as is always the case with this type of pattern, the direction of the move was not known until it occurred.

The weekly chart of WTI below shows that in the second week of April the US crude oil price broke the pattern to the downside and quickly fell around $5 (circled). Although WTI is now trading back inside the original pattern, the weekly chart reveals that a larger scale triangle pattern is taking shape.

A 3 year (weekly) chart of WTI (Click on the chart for a larger version)

A 3 year (weekly) chart of WTI (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The pattern already meets the requirements of a triangle consolidation pattern, i.e., it has at least two touch points (reactions) at both the upper resistance and lower support lines, however it is not clear whether or not the pattern has a bearish bias.

If the lower support line were horizontal then the pattern would be classified as a descending triangle, which is generally considered bearish. As it is, only time will tell, however a breakout in either direction could produce a significant move, and the longer the price remains in the pattern, the more energy it will build.

Stocks

Japanese Nikkei stock index

As the chart below shows, the Japanese Nikkei stock index is in a well defined and powerful uptrend. Since making a low of 8,619.45 on 13 November 2012 the index has rallied an incredible 58.9% and is currently sitting at 13,694.04.

A 6 month (daily) chart of the Nikkei (Click on the chart for a larger version)

A 6 month (daily) chart of the Nikkei (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Wilshire 5000 stock index

As the chart below shows, the Wilshire 5000, the broadest index of US equities, is also in a strong uptrend. Since making a low of 14,036.94 on 16 November 2012 the index has risen by 21.4%, and the trend remains intact.

A 1 year (daily) chart of the Wilshire 5000 (Click on the chart for a larger version)

A 1 year (daily) chart of the Wilshire 5000 (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Many analysts will argue that these indices (particularly the Nikkei) are overdue a correction. However, those approaching the markets from a trend following perspective do not question the magnitude of the rise, nor the reasons for it. They simply stay with the trend as long as it remains intact.

S&P 500 (financials)

As the chart below shows, since late last year the best performing sector in the S&P 500 has been the financials (brown line).

S&P 500 Sectors: 16 July 2012 – 2 May 2013 (Click on the chart for a larger version)

S&P 500 Sectors: 16 July 2012 – 2 May 2013 (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Those that want to profit from the powerful uptrend in the financials sector, could consider going long the Vanguard Financials ETF (VFH). As the chart below shows, the exchange traded fund bottomed on 16 November last year and has since rallied 27%.

A 1 year (daily) chart of the Vanguard Financials ETF (Click on the chart for a larger version)

A 1 year (daily) chart of the Vanguard Financials ETF (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Those looking to protect their downside could consider using a stop loss system that takes it’s sell signal from a break of the lower blue trend channel, or a cross of the 20-day and 45-day moving averages.

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