The risk-off trade took center stage on Thursday. Treasuries and the Dollar were higher, while stocks, commodities and the Euro were lower. Gold followed the stock market again. The S&P 500 ETF (SPY) broke triangle support with a sharp decline over the last two days. After a sharp advance in October, this November triangle was supposed to be a bullish continuation pattern. It did not work out and we now have a failed pattern. Instead of breaking resistance to signal a continuation higher, SPY failed to breakout and broke supports at 124.50 and then at 123. Broken supports now turn into the first resistance areas to watch. I am going to set short-term resistance at 125 for now. A recovery above this level would call for a reassessment of this week's bearish developments. RSI confirmed the breakdown with a move below 40. This momentum oscillator was stuck in a range for over a week and broke the lower boundary. Also note that this is the second time RSI has become oversold this month. Oversold readings typically occur in downtrends, not uptrends. Keep in mind that this 60-minute chart analysis is focused on the short-term (1-4 weeks). Tune into the Indicator Summary (later today at Art's Charts) and the Market Message (along with John Murphy) for a longer term perspective.
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The risk-off trade fell into place on Thursday as the 20+ year Bond ETF (TLT) moved counter to the stock market. TLT bounced off support on Monday and broke above falling flag resistance on Thursday. This breakout signals a continuation of the prior advance and targets further gains towards the early October high around 125.
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No change. The US Dollar Fund (UUP) reversed its downtrend with a surge-breakout above 21.70, formed a falling flag and then broke flag resistance with a surge last week. Despite a pullback on Friday, the ETF held support and surged back above 22 this week. This surge reinforces support in the 21.60 area. Further strength in the Dollar, which means weakness in the Euro, could weigh on stocks, especially if Treasuries start moving higher too.
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The US Oil Fund (USO) finally succumbed to weakness in the stock market and declined sharply on Thursday. It is still too early to call for a top or consider the short-term trend down. Broken resistance, Monday's low and the late October trendline combine to mark support in the 37.5-38 area. Also notice that 20-period RSI has held the 40-50 zone since late October. A break below 37.50 in USO and 40 in RSI would be enough to reverse the short-term uptrend.
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The Gold SPDR (GLD) followed the stock market lower on Thursday. Gold has been positively correlated with the stock market since early October. On the price chart, GLD broke support and broken support turns into the first resistance zone around 170-171. It is possible that a falling flag or channel is taking shape. The upper trendline was drawn first and the lower trendline is parallel. GLD is oversold after a sharp decline to the lower trendline and we could see an oversold bounce back to broken support.
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Key Economic Reports:
Fri - Nov 18 - 10:00 - Leading Indicators
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.
