Global equities remain tethered to the Euro and the outlook for the European debt dilemma. Even though a big ocean separates the US from Europe, US traders and investors should keep an eye on the spread between German bond yields and other bond yields, namely Italian and Spanish. This is basically the risk premium attached to owning these bonds. Financial markets are likely to remain jittery as long as these spreads continue to widen.
The S&P 500 ETF (SPY) reversed its short-term upswing with a gap and big support break on Wednesday. With this decline, the consolidation breakout failed to hold. SPY broke first support with the opening gap and key support with a continuation lower in the final hour. The inability to bounce shows underlying weakness. Buyers were not willing to step in when SPY was selling at a 2% discount to Tuesday's close. This trend reversal means that a lower high formed at 128. Moreover, the breakdown signals a continuation of the prior decline and targets a move to the next support zone around 119-120. Broken support in the 126 area becomes the first resistance zone to watch (yellow area). Key resistance is set at 128 for now. RSI confirmed the trend change with a break below support at 45. Also notice that RSI became oversold for the first time since early October and failed to reach overbought levels during the most recent upswing. This is further evidence that a short-term downtrend has emerged and a move below last week's low is expected.
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Weakness in stocks and the Euro pushed money into Treasuries as the risk-off trade took center stage on Wednesday. Even though the 20+ year Bond ETF (TLT) moved sharply higher on the day, it closed below its morning high and the breakout did not hold. Given Wednesday's risk-off mood, I would have expected a stronger close and a more convincing breakout. Overall, TLT reversed the October downtrend with a breakout surge to 119 at the beginning of November. The ETF consolidated after this breakout and still looks poised to continue higher with Wednesday's surge. The lows of the last two weeks mark key support. Failure to continue higher and a break below these lows would be bearish.
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With European debt woes hitting the Euro hard on Wednesday, the US Dollar Fund (UUP) surged above Falling Flag resistance. This move signals a continuation of the prior surge (21.1 to 21.9). More importantly, the move keeps the prior breakout and trend change alive. The Dollar reversed the October downtrend with two big surges over the last three weeks. Traditional technical analysis suggests that the next target is in the 22.4-22.6 area. The length of the first advance (.80) is added to the flag low for an upside target (21.6 + .8 = 22.4). The flag lows now mark key support. Broken resistance from the flag highs turns into the first support zone to watch.
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The US Oil Fund (USO) continues to hold up better than the stock market. Even though stocks and the Euro were hammered, the decline in oil was relatively minor. The Falling Flag breakout remains in play as broken resistance turns into support in the 36-36.5 area. Despite strength, I am not sure how long oil can hold up in the face of stock market weakness. A move below the support zone would be the first sign of trouble. Key support remains at 34.50.
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The Gold SPDR (GLD) surged as the Dollar edged lower the prior five days and then pulled back as the Dollar surged on Wednesday. As noted above, UUP traced out a bull flag and the breakout signals a continuation of the uptrend. Further strength in the Dollar could weigh on gold, especially because it became overbought after the move from 156 to 175 and could correct more. Broken resistance and the late October trendline mark first support in the 170-171 area. Gold is still a currency alternative and may find support sooner rather than later.
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Key Economic Reports:
Thu - Nov 10 - 08:30 - Jobless Claims
Fri - Nov 11 - 09:55 - Michigan Sentiment
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.
