Stocks broke lower on Monday.

Monday was day 36 for the daily equity cycle, placing stocks in their timing band for a daily cycle low. The peak on day 33 assures us of a right translated daily cycle formation, giving us the expectation for stocks to print a higher daily cycle low. So if stocks form a daily swing low, it will have good odds of marking the daily cycle low.

Two things that I am paying attention to is the RSI and the TSI. The RSI is oversold. When stocks are in the advancing stage of their intermediate cycle then RSI does not stay oversold for long, as witnessed in early December. So a quick rebound of the RSI will indicate a continuation of the intermediate cycle advance. But the bearish TSI divergence is a concern. If RSI does not recover quickly that will point to stocks beginning their intermediate cycle decline. Which is something that I plan to discuss in the Mid-Week Update.

Stocks Deliver Warning Signal

Stocks closed lower on Thursday, calling into question if day 32 was the daily cycle low.

Stocks printed their lowest point last Thursday, which was day 32, to place stocks in their timing band for a daily cycle low. Stocks went on to form a swing low and close above the 10 day MA to have us label day 32 as the daily cycle low. But then stocks closed lower on Thursday …

There are three things that make me wonder whether or not day 32 was the daily cycle low. The 1st concern is the 10 day MA did not turn decisively lower. Normally during a decline into a cycle low the 10 day MA breaks noticeably lower. The 2nd concern is the bearish divergence on the True Strength Indicator. And the 3rd concern is the RSI turning lower. During an advancing phase of the intermediate cycle RSI tends to stay overbought for extended periods of time. The RSI reversed this time without even being oversold. That change in behavior by itself is a warning signal. When combined with the other signals, it has me wondering if stocks are still declining into their daily cycle low.

Natgas Confirms Daily Cycle Decline

Tuesday was day 17 for the daily Natgas cycle. That places Natgas in the early part of its timing band for a daily cycle low.

After crawling along the 50 day MA, Natgas closed below it on Monday. It then delivered bearish follow through on Tuesday to close below the 10 day MA, confirming the daily cycle decline. Something to watch out for is that the previous daily cycle was quite stretched at 43 days. Since often times a stretched cycle is followed by a shortened cycle, Natgas could from a DCL over the next few days.

As discussed in The Weekend Updates I believe that the June low was an intermediate cycle low, indicating that Natgas has begun a new intermediate cycle. The bullish RSI pattern that is emerging aligns with an advancing phase of a new intermediate cycle. And if I am correct that Natgas has begun a new intermediate cycle then once RSI becomes oversold it should quickly reverse. So if we see RSI become oversold and reverse quickly, that would be our signal that Natgas is in an advancing phase of a new intermediate cycle and has begun its second daily cycle.

Oil Testing Triple Resistance

After peaking on day 18, oil printed a huge bearish candle that closed below triple support of the 200 day MA, the 50 day MA and the 10 day MA to signal the daily cycle decline.

But then oil did not deliver any bearish follow through.

Oil printed its lowest point on day 20. A swing low has since formed which allows us to construct the daily cycle trend line. A break below the trend line will confirm the daily cycle decline. However it appears that oil is beginning to coil below the triple resistance area. RSI has turned higher and the True Strength Indicator is close to delivering a bullish crossover. We also need to keep in mind that oil has just begun a new daily uptrend and is still early (week 5) in its intermediate cycle. Therefore a close above the 200 day MA will continue the daily uptrend and should result in a trending move.

Bullish Conviction

Despite stocks dropping further on Tuesday, I maintain my bullish conviction.

When stocks printed their cycle low on October, they were very late in their timing band for forming an intermediate (weekly) cycle low. Therefore the new daily cycle has very good odds of also initiating a new intermediate cycle.

The powerful thrust out of the cycle low (which was discussed here) caused stocks to leave behind 2 gaps. One of those gaps was filled on Monday. Tuesday’s lower low has positioned stocks to fill that lower gap.

Despite stocks closing lower for 4 days, there are some indicators that align with stocks emerging from their intermediate cycle low. First off, there is an emerging bullish pattern developing on RSI. Even though stocks were down for 4 straight days, RSI is not oversold. If RSI prints a reversal after testing oversold that would indicate that stocks are advancing in a new intermediate cycle.

Another indication that stocks are in a new intermediate cycle are the Buying on Weakness days that are beginning to cluster. Stocks printed another 170 million in Buying on Weakness on Tuesday. We have seen that predictive value of these BOW days rises the more these days cluster. And the additional BOW day on Tuesday brings the recent total to over 1 billion BOW.