I wanted to take a look at ERX (3x energy bull) and speculate the direction of this chart and the implications for the overall market. One could say lower energy prices would be bullish for the overall consumer as energy acts like a tax preventing people from spending that money. When I take a look at the action above I see a decline 50 day moving average which in the past has acted as resistance. Given today’s move on fairly weak volume when you compare it to recent weeks and one could view this chart as running out of steam.
Another way to look at lower energy prices is to consider it to be bearish for the overall economy, as it’s a tell that the global growth engine is running on fumes. Given the significant amount of macroeconomic news in the markets this week and with the jobs data on tap tomorrow, I suspect we’ll get a good idea of what this rally is made of tomorrow.
I suspect the initial move at the open will be the exact opposite of the way the markets are going to trade for the next few weeks. Significant opening weakness that is met with buying in the afternoon should be enough to show investors that this market is in full out bear market rally mode and we could move another 10% from today’s closing levels. Should the markets gap a few hundred points higher at the open, that may be too much for the bulls to sustain on the heels of a big 3 day rally, and we could easily begin a retracement phase that could see the markets moving lower to sideways for the next couple of weeks as it digests it’s recent gains.