The markets have seen some big trend shifts this month, but I see them as temporary. I remain bearish stocks for now, and bullish commodities, particularly crude oil, corn and natural gas.

Stocks are in a Bear Market

The stock market has been very volatile in this last week of July. Equity indexes gained ground on Tuesday, July 29, after crude oil fell nearly $4 a barrel and the market embraced a better-than-expected rise in consumer confidence.

Fundamentally, the U.S. still has a mess to deal with in the mortgage market. Lending is tight despite historically low rates and banks are continuing to walk on thin ice. We are currently in a bear market.

The last bear market in the U.S. was in the year 2000, and it lasted about three years until May of 2003. From 2003 to the beginning of 2008, the U.S. stock market was in a strong bull market. We could see this easily through the basic trend channels below. Trend channels are a good way to easily see where support and resistance points are based on a long-term view. 

In the short term, I see support in the S&P 500 at 1234. From a strictly technical point of view, 1234 and 1291 are important support and resistance levels for the last week of July in the S&P 500. If the market can close above 1291, we may see a short-term move higher. However, in order for this bear market to be over, I think we need to climb above 1396.

The last bear market lasted three years, and the current one has lasted about a year so far. The stock market still has room to fall. It certainly seems heavy and the trend is definitely to the downside. Any close below 1235 and things could get ugly. I believe this market could go as low as 1150 if September S&P futures close below 1235 in the last week of July. To negate this short-term down trend, I’d like to see a close above 1291. I would become neutral at that point.

Commodities are Still in a Bull Market

The commodity markets are still in a long-term bullish trend. China and India aren’t going anywhere, so we can expect demand to continue to climb. I’m bullish on gold, crude oil, corn and natural gas.

Since commodity markets are known for being volatile, it’s important to use stops. I prefer to use stops based on closing prices, rather than intra-day prices. In my opinion, this gives a trader less chances of getting stopped-out from wild intra-day swings.

I place my stops based on long-term trend channels and moving averages. The moving averages I like to use are based on Fibonacci numbers, specifically 34, 55 and 144-period moving averages. In all of the charts below you’ll notice three lines, blue, red and green, that represent 34, 55 and 144-period moving averages, respectively.

As you can see in the chart above, gold is obviously in an uptrend. As long as we stay above $925 an ounce in this market, I am wildly bullish. If the market closes below $925, I would still be bullish, but would exit my long position out of caution.

I’m also bullish on crude oil. However, I’m nervous about the acceleration at which the market dropped recently. Crude oil dropped very quickly from near $150 to near $126 on July 29. I’m looking for a short-term bounce at the moment, but would exit my long position if the market closed below $121.40. I think the drop in crude oil is overdone and expect it to continue higher.

Fundamentally speaking, the market has seen some serious draws from inventory. That tells me that either there isn’t enough supply to replenish the inventories or demand is still strong despite the high price of crude oil.

Crude oil and corn are currently very closely correlated as you can see from both of the charts above. Since I’m expecting a bounce in crude oil, I’m also expecting a bounce in corn. I would place my stop on a close below $5.63.

Almost a year ago, corn was trading near $8 a bushel. The market has since seen a nice correction, which I believe is almost over. I see it as a buying opportunity. Mark your calendar for August 12, which is the next major crop production report from the USDA.

In the short term, I recommend buying natural gas with a stop on a close below $8.89. On a long-term view, I am very bullish. I think the market could spike to $26 per British thermal units over the next 3-5 years. This market has also seen a correction from its recent high of $13.5 and this may be a good buying opportunity. Former oil man and hedge fund chairman, T. Boone Pickens, recently introduced an energy policy that would transfer much of our energy needs to natural gas. If this energy policy is adopted, look for a spike in natural gas.

Don’t view the recent retreat in commodities as the end of their bull market. It’s very tough to pick tops in bull markets and I don’t think we’ve seen it yet. Some setbacks in prices lead to buying opportunities, but approach all of these markets with caution. If you would like specific trading strategies based on the size of your account and your risk tolerance, please feel free to give me a call at 800-266-0551.

Blake Robben is a Senior Market Strategist with Lind Plus. He can be reached at 800-266-0551 or via email at brobben@lind-waldock.com.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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