With only a few days left in August, the battle for the Dow is set between the bulls and the bears.
Oil and equities
The price of oil is not falling fast enough. At $115, with America in recession, this price level is too high and will cause inflation. Expect to see some drastic action in the coming weeks.
Technically, the price of oil looks like it can push up from here.
We use the words “drastic action” loosely at this point because all it means is that the U.S. government will try and strengthen the U.S. dollar in the hope that the oil price will fall. In trading Tuesday night the reverse happened. The U.S. dollar strengthened and oil strengthened.
If this trend continues then the U.S. economy is in big trouble, and the ramifications could be catastrophic.
The rest of the world continues to consume oil at a pace never seen before. Supply issues, be it hurricanes, refineries, country risk, or plain old lack of supply, continue to place a floor in the oil price. The floor is too high to assist the U.S. economy during a slowdown. This means that the U.S. is in a protracted period of stagflation. We wonder what the price of oil would be if the U.S. was in a growth phase.
As we said Tuesday, it is the oil price that will be the first to show signs that its price is no longer driven by demand; instead, it is driven by supply. This will effectively create a floor in the price of oil, regardless of demand. In time, this will spill over to other commodities.
Equities
As we mentioned at the start of the month, technically, the fate of the Dow is all about this month, August.
The Dow in July made a new low and closed where it opened – incidentally, the same level it closed at the previous month. This price action is mildly supportive but nowhere near significant enough to suggest that the bear market is over.
What the stock market does during August will set the course for the rest of the year. Further, if the stocks rally this month and close on their highs, we would have a strong buy signal.
To us right now this seems a pretty tough ask. The bulls and bears continue to fight hard, as evidenced by the up 200, down 240 Friday/Monday battle. Our trade record is set, looking for a break to the downside.
Importantly, our trade record relies on a downside break of major support and break of the recent range. If it happens, great; if it doesn’t, we won’t chase the market. With just a few days to go, the battle is set for the Dow. If the bears win, it is likely that we will go short.
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