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3 charts that show why stocks, oil, & emerging markets could rally by year-end

Lawrence Lewitinn
Lawrence Lewitinn

Stocks and crude oil are gearing up for a rally by the end of the year, according to one leading technical analyst.

The S&P 500 (^GSPC) fell 7% in the third quarter of 2015, its worst quarter in four years. But Katie Stockton, chief technical strategist at BTIG, sees positive signs in the index’s charts.

One reason Stockton is optimistic on the S&P 500 is that September’s dip to a low of 1,879 failed to break below August’s plunge to 1,876. She expects the index will ultimately form a bullish double-bottom pattern.

“The swift nature of that correction that we saw in August is more characteristic of a bull market correction as opposed to the beginning of a bearish reversal,” said Stockton, who is also vice president of the Market Technicians Association.

Other indices also showed a double bottom, she added. “That’s what we call a shakeout of the weak holders of the market.”

A break above the 2,000 level – under 5 points from Wednesday’s close – would confirm that the S&P 500 the worst is behind it, Stockton predicts.

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She also sees a break to the upside in the price of crude oil (CLX15.NYM), which dropped 24% in the last quarter but is now up 8% since the start of October.

“Long-term, it’s a downtrend in crude oil, there’s no denying that,” said Stockton “But what we’ve seen in the past couple of days is that it is finally pulling away from its 50-day moving average which it has really been tethered to for weeks. That breakout is short-term in nature but it does support upside follow-through in the near term.”

Stockton’s chart of West Texas Intermediate crude oil shows an ascending triangle pattern in place since August with a $50 per barrel resistance level. She maintains that a move above that level will have implications beyond just the energy sector.

“It shows a spreading out of what could be the rally in the broader markets,” Stockton said. “When people rotate more into those more oversold areas of the market, it shows a bit of a ‘risk on’ trade.”

One of those trades may be in emerging market equities. The ETF that tracks the MSCI Emerging Market index (trading under the ticker symbol EEM) has suffered tremendously in recent months, collapsing by nearly 18% in the third quarter of 2015. Yet Stockton expects a rebound there, too.

“You see some similarities between the EEM, representing emerging markets, and the crude oil chart,” she explained. “We’ve seen EEM clear its 50-day moving average for the first time since May. That just shows us significant improvement in momentum, a loss of downside momentum on an intermediate-term basis. It shows promise for upside follow-through that we still need to view as a countertrend move in the emerging markets, but [it is] something that’s certainly tradable.”

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