Yesterday’s bounce was quite understandable, but a lot of upside follow-through near-term is doubtful.
Even though the stock market did not fall very much on the news that the U.S. had killed Iran’s most important military leader last week, it still bounced strongly when it became evident that the situation is not going to escalate with Iran (at least not immediately). If you include this morning’s gain in the S&P futures, this down/up sequence (with the “up move” stronger than the initial “down move”) has pushed the S&P 500 to a higher level than it stood before the original attack.
The move in crude oil has been exactly the same…just in the opposite direction. WTI saw a mild gain after this news of the U.S. attack hit the tape late last week…and it accelerated at the beginning of this week when Iran shot missiles at U.S. sights within Iraq. However, just like it was with the stock market, that move was reveresed quickly…and the ensuing decline took oil prices back below where they were trading before last week’s incident (and back below $60 on WTI).
The situation with Iran has been pushed to the sidelines…which is obviously positive, but it’s far from over.
Quite a few experts on the Middle East believe that the situation with Iran is still a wild card…and we should see more problems in the weeks and months ahead. Several believe Iran was smart in de-escalating things now…so that when their proxies hit back once again at some point in the future (probably by hitting U.S. allies), they’ll be able to use the plausable denial excuse. That, these experts say, won’t keep the situation from escalating once again, BUT by doing things in this manner, Iran WILL help Iran from escalating the situation in a very major way (immediately)…and prevent a full-scale war. In other words, Iran knows they cannot win a full-scale war with the U.S., but it does not mean they’re going to settle for a “one and done” strike…and spend the rest of 2020 shaking with fear.
What we’re saying is that the situation has not been moved behind us, but it HAS been moved to the sidelines for a while. Having this issue move to the sidelines is certainly a positive development, but we wonder if yesterday’s developments are enough to take the market higher than it was before the original attacks took place (and take oil to a lower level than it stood last week) given that these geopolitical tensions could/should raise its ugly head again at some point in the future.
Besides, the stock market is overbought…and earning season is about to begin.
However, the more important reason we question yesterday’s strong jump (and this morning’s upside follow-through) is because the stock market had become quite overbought. Again, the news from yesterdays WAS positive, but was it really enough to take an overbought market a lot higher from current levels…especially since we’re about to a key economic number (tomorrow’s employment report…and more importantly, we’re about to enter earnings season??? The Fed’s “not QE” QE program is obviously that stands firmly on the bullish side of the bull/bear ledger, but it does not mean that the stock market will rally in a straight line. It certainly did not during previous QE programs.
We definitely understand why the markets have retraced their entire moves from Friday into early this week, but we question whether good-sized reversals will signal a return to the kind of trajectory we saw in risk assets during the 4th quarter of last year.
Gold’s reversal (lower) could last a bit longer, but any meaningful close above its recent closing highs will be VERY bullish.
Anyway, over the weekend, we highlighted that the break above $1,550 in gold was a very bullish development…BUT we also said that it had become VERY overbought on a short-term basis and thus was getting ripe for a pull-back. Well, it rallied further this week, but yesterday’s developments caused the yellow metal to reverse in a significant fashion. In fact, gold fell over $50 from its Tuesday night/Wednesday morning highs. In other words, unlike the stock market and crude oil, gold DID see a powerful move after the news of the death of General Soleimani last week. Thus the fact gold saw a major reversal yesterday WAS understandable for this asset class.
In fact, we would argue that this was a very healthy development for the yellow metal….and gives it a better chance to rally further…over a longer period of time…as we move through the first half of 2020. What we’ll be watching is to see how it acts if/when it gets down to that $1,550 level. As we’ve said many times in the past, “old resistance” usually becomes “new support” in technical analysis, so an ideal move for the gold bugs would be for gold to hold this “new support” level over the coming days and weeks.
Having said this, even though gold has worked-off its extremely overbought condition, it is still overbought on a very-short-term basis. Therefore, we wouldn’t be surprised if the commodity broke back below that $1,550 level before it bottoms. However, this would only be slightly disappointing. Support/resistance levels can be broken in a mild manner without it having important implications for the asset involved. This is especially true during times of volatility.
Therefore, as long as any near-term decline in gold is not a powerful one…the bullish intermediate/long-term trend that has developed in gold recently should remain intact…..What we’ll be watching for over the coming days and weeks is whether gold can indeed make a shallow dip right now…even if it falls below $1,550. If the yellow metal can follow a shallow dip…with a strong move above its closing highs from this week of $1,575)…it will indicate that gold’s breakout has indeed been confirmed…and that it has a lot further to run.
Tesla (TSLA) has become VERY overbought. Take some profits…(but be VERY careful about shorting it…duh).
Shifting gears one more time, we’d like to talk about Tesla (TSLA). After making some great calls on this name in the late spring/early summer of last year, we have not discussed this stock in a while. (As a reminder, we suggested shorting it when it broke below $250 in May….and then suggesting covering the shorts at $200…and THEN we said it was a great buying opportunity when it dipped below $190 in early June).
Needless to say, the rally since then has been unbelievable. However, it is getting VERY, VERY, VERY overbought. It’s daily (14 day) RSI chart rose above 87 at one point yesterday…and its weekly RSI moved above 82 (before closing just below it). The 180% rally it has seen over the past 6-7 months is even more than the 115% rally than it saw over 6-7 months in the first half of 2017. At that time, its weekly RSI topped-out at a lower level (near 80)…and it was followed by a 20% decline (and it did not breach those 2017 highs until just recently). Therefore, it’s hard to think that the stock can rally a lot more over the very-short-term. It might go higher (maybe a lot higher) over the intermediate and/or long-term, but it’s getting VERY EXTENDED on a short-term basis.
HAVING SAID THIS, we DO need to point out that back in 2013, TSLA rallied 450% over a 6-7 month period…and is weekly RSI chart got above 93 before it topped-out!!! With this in mind, those looking to short the stock will NEED to be VERY careful. In other words, the extreme technical condition we’re pointing out this morning is something that should lead investors (and especially “traders”) to think about taking some chips off the table on the long side of things in TSLA (or at least lead them to “step-back” on the long side)…rather than shorting the stock up here. Those who DO want to short the stock…should only be traders who have a VERY high tolerance for risk…and who use extremely tight stop-out levels.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.