The SPX, the S&P500 large cap index, has been feeling a little sick these past two days. The S&P500 mini-futures (ES), which is the vehicle we use to trade the broader market, closed yesterday at 2058.75, right at the 200-day moving average and about 30 points from Monday’s opening price.  And it needed an end-of-day rally to get back up to that level.

As we have been saying for the past couple of weeks, there are lots of reasons to think the long-term outlook for US equities is not that hot. Earlier this week we saw another vivid demonstration of the effect of the crash in commodity prices on commodity producers. Anglo American PLC, the fifth largest mining company in the world, is going to chop its business in half to cut costs and stay afloat.

Anglo American will cut its workforce by 85,000, sell or close 60% of its world-wide operations, and take writedowns of $3.7 billion to $4.7 billion. Oh, and the annual dividend is gone. The company will still be in business, but it will be much, much smaller. And the CEO promises there may be even more cuts if prices for the commodities they produce don’t turn around.

In fact the there is a worldwide glut of virtually all commodities – including oil – that is likely to persist for years. The Bloomberg commodities index fell to 22-year-lows this month, and the companies – and the countries – that rely on commodity sales are drowning. For example, in the first 11 months of 2015, average prices for iron ore, already at multi-year lows, are down 39%.

That’s one of the reasons the Canadian dollar, like commodity-based currencies everywhere, has fallen from 98 cents US to 73 cents. When global trade stops moving – and if you want to see how huge the decline is, check the Baltic Dry shipping index – the market for commodities shrivels, and so do the companies s and countries that depend on them.

But as with all of these problems around ”fundamentals” the stock market is blissfully unconcerned.  While global commodity markets are in a deflationary spiral, equity prices have been largely unaffected.

That can’t continue. We will likely get through Christmas and New Years without any major stumbles in US equity indices. We have a lot of confidence in the ability of fund managers to move the market when their year-old bonuses are at stake. The SPX is essentially flat for the year so far, but don’t bet against a sudden rally that lifts the market into the year-end. The Fed’s FOMC meeting next week may be the spark that starts it.

But after that …

Today

This is rollover week and traders are already moving into the March 2016 contract on the ES. It will be choppy this week. The futures are oversold from the decline in the last two days, and we may see a little bounce today.

If we do get a bounce, yesterday’s regular session high around 2073 will be the first resistance. A move above 2078.50 could trigger a short squeeze and push price back up to 2081-2084.50 or 2090.50-88.50.

On the downside, if the price drops below 2048, it could trigger sell stops and lead the price lower to 2043-39.50 zone. The 2040 low created on Dec. 3 hasn’t been tested yet. At some point it will be. As soon as the current oversold condition is corrected, we should expect the short-term decline to continue.

Major support levels: 2050-45, 2030.50-32.50, 2019.50-22.50

Major resistance levels: 2088-89.50 2105-08, 2114.50-16.50, 2121-23.50

 

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Chart:  ESZ5 Daily chart Dec. 8, 2015

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