Two important indicators for stocks are potentially flashing a strongly bullish signal.
First, the volatility index VIX was in a strong uptrend since last August. However, over the last two weeks, the VIX has broken down. That implies that the strong sell offs in stocks will be replaced by less aggressive retracements. In other words, stocks can continue their uptrend.
More important, however, is the seeming breakout in crude oil. As the next chart shows, crude is breaking through its downtrend.
Do not underestimate this move in crude oil. As we have explained here, crude was the single most important (intermarket) driver of panic selling in stock markets. As crude oil recovers, it provides fuel (literally) to stock markets globally.
The combination of the above two indicators could have huge implications for stock markets globally.
Let’s review where key stock indexes stand as the VIX is breaking down and crude oil breaking out.
First, the US stock market, represented by the S&P 500, is very close to huge resistance. That is definitely a strong tailwind, even with the two bullish indicators outlined above. It is key to watch how the S&P 500 will behave at resistance. Basically, there are two options. First, resistance will prove to be too strong, and stocks retrace, which is the most likely path. In such a scenario it will be key to see how far stocks will retrace, and how crude and VIX behave during that retracement. Second, stocks pierce through resistance, which would imply the continuation of the stock bull market.
The latter scenario seems rather impossible, given how stocks have behaved in the last 9 months (huge sell offs) and 18 months (huge consolidation range). However, given monetary policies, and the confirmation of central banks that they stand ready to intervene (which they even did recently, big time), could certainly push stocks much higher.
One of the other indicators we are closely following is the NYSE index as well as the percentage stocks above their 200 day moving average in that index. As seen on the next chart, the key take-away is that the NYSE is nearing a test of its 90 day moving average (moving average on the upper pane), so it is critical to watch how the index behaves in the coming weeks. Next to that, the lower pane shows that the number of stocks above their 200 day moving average is rising to very interesting levels (close to the important 70% level), which imply that the recent rally has a strong market breadth.
If the stock bull trend will continue, we should see the index break above its 90 day moving average (upper pane) along with an improving percentage of stocks above their 200 day moving average (lower pane), similar to how previous retracements turned bullish in the past (see red rectangles).
April and May will become very important months, as we will get to know whether the stock bull market is still intact or whether it died. Stocks will most likely retrace as of early May, as they are near huge resistance. Investors should be watching very closely whether the breakdown in the volatility index VIX holds, as well the breakout in crude oil.
Next to that, the ability of the NYSE to break above its 90 week moving average, and the percentage stocks above the 200 day moving average in the NYSE making a higher low during the next retracement, are key indicators to confirm the continuation of the bull run in U.S. stock markets, and, hence, in global stocks.