For the first time in twelve months we are seeing a “squeeze” on the weekly charts of the Stock Markets – namely the S&P 500 (ES) index.
A squeeze means the market is brewing for an explosive move – but it does not tell us the direction of the move.
Take a look at what happened the last time a squeeze like this “fired” a signal back in December of 2011 (see chart below):
As you can see, the squeeze fires when bollinger bands (blue lines) exit the keltner channels (red lines). This sent the stock market flying from 1255 to 1406 within three months! That is a gain of almost 12% by March 2012.
The only difference is that this time we do not yet know which direction the market will “breakout” once the squeeze does fire a signal – and we don’t know when this will happen.
But there are some clues…
The current trend of the markets is still upwards, so the probability is greater that we could see the market break further higher to continue the uptrend. However, a move to the downside cannot be ruled out.
A key market to watch is the Bonds (see chart) – which typically move in the opposite direction to stocks:
We can see that Bonds are also in a squeeze – and they don’t show any sign of weakness as yet. Because Bonds are a bigger market – they will decide what will happen to stocks. If the squeeze on Bonds “fires” long (to the upside) this could mean very bad news for stocks (and vice versa).
Sentiment readings show that smart money and dumb money are tied as both are 50% confident in a stock market rally (this is according to research by Sentimentrader). So that doesn’t really help us.
I don’t expect any fireworks from stocks (and bonds) until January 2013. We are too close now to the end of the year and markets tend to wind down in the final few weeks.
As the above chart of stocks shows, the December 2011 squeeze on stocks did not fire until January 2012. So come this January and February 2013 be prepared for a lot of volatility and action in stocks.
Right now I am interested in what is happening in Crude Oil. From both a fundamental and technical perspective, I like Crude short (see chart):
The squeeze on Crude Oil appears to want to break lower. I am looking to short Crude at a break below 85.65 with initial targets at 82.89 and 80.86.
Even if you don’t care to trade it, it hopefully means lower gas prices for us all at the pump! Which is great timing for Christmas as well.