Art's Charts

Flight to Safety Extends Intermarket Trends

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With another big move in stocks and bonds, the underlying trends have accelerated even further to become more extended. The only thing we can do at this point is respect the trend. The downtrend is too strong to justify longs and too oversold to justify new shorts. The ability to become oversold and become even more oversold reflects an enormous amount of selling pressure. Over the last nine trading days, QQQ is down 9.11%, SPY is down 10.64% and IWM is down 13.62%. In fact, we do not need indicators to tell us the market is oversold. On the price charts, the major index ETFs formed high-volume hammers on Wednesday, but opened weak and plunged on Thursday. Estimating short-term support has become a lesson in futility. Even estimating short-term resistance seems futile in such a downtrend. In any case, broken support levels and the late July trendlines mark the first resistance levels to watch should an oversold bounce take hold. 

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The 20+ year Bond ETF (TLT) is now up over 10% in the last two weeks. This is a huge move for bonds. There is clearly some fear out there with investors willing to buy instruments that yield less than 3% over a 10 year period. But don't let the low yield fool you. There is also a capital appreciation side to this story, which far outweighs the yield. Many buyers are looking for a trade, not a 10 year holding.

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The US Dollar Fund (UUP) broke resistance with a gap up and strong close. The combination of Euro weakness and Yen intervention pushed the US Dollar sharply higher. Money moving into bonds also helped because foreign buyers must have Dollars to be US bonds. The 3-month T-Bill Yield ($IRX) plunged back to its July levels as money sought short-term refuge in T-Bills that yield next to nothing. Throw in some inflation and the yield is negative.

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A plunge in stocks and surge in the Dollar was more than oil could handle. The 12-Month US Oil Fund (USL) declined over 5% on Thursday and is down over 10% the last two weeks. Broken support and the July trendline combine to mark resistance in the 42 area.

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Even gold took a hit on Thursday with a small decline. I am not going to read much into this decline because the trend remains unscathed. On the Gold SPDR (GLD) chart, the mid July trendline and broken resistance mark the first support zone around 159-160. There is a bigger support zone around 154-155 from the mid July lows.

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Key Economic Reports:
       
Fri - Aug 05 - 08:30 - Employment Report
   
Charts of Interest:    Tuesday and Thursday in separate post.

This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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