A disappointing outlook from Cisco (CSCO) weighed on the tech sector Thursday. In particular, the company sighted future concerns on government spending in the US and Europe. A $2 billion derivatives loss from JP Morgan Chase (JPM) is weighing on stock futures early Friday. This loss could expand another $1 billion, which is just creating more uncertainty in the finance sector. A sharp decline in JPM will hit the finance sector hard and cast a shadow on the other too-big-to-fail (TBTF) banks. This means the major index ETFs (DIA, IWM, MDY, RSP) will challenge support levels again on Friday. Even though stocks firmed, Thursday's trading suffered from a clear lack of buyers. Traders are not eager to commit new capital with uncertainty hanging over Europe, tech titan Cisco (techs) and now JP Morgan Chase (banks). In short, stocks have not fallen far enough to warrant the perceived risk.
On the S&P 500 ETF (SPY) chart, the ETF broke the April lows and then consolidated below 137. SPY made a feeble breakout attempt, but failed and will likely be pushed back further today. RSI is hitting resistance in the 50-60 zone and StochRSI is overbought. A move below .50 in StochRSI would signal a bearish reversal in short-term momentum. Overall, the stage is set for a continuation of the early May decline. With a weak open expected today, I will set key resistance at the mid week highs. A break above these mid week highs and an RSI break above 60 would reverse the short-term downtrend and we could then see a retracement of the prior decline, perhaps back to the 138.5-139 area.
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Treasuries are in the midst of an eight week run and remain the strongest asset class since early April. The 20+ Year T-Bond ETF (TLT) will continue to benefit as long as the markets remain in risk-off mode (Dollar up, Euro down, oil down, stocks down). It is not about the paltry yield, but rather the flight to relative safety. Broken resistance and the March trendline mark first support in the 117-117.50 area. Key support remains in the 115.5-116 area.
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Weakness in the Euro is fueling the risk-off trade and benefitting the Dollar. Note that the US Dollar Index is up nine days straight, its longest winning stretch in over three years. However, also note that the nine day Rate-of-Change is one of the smallest in the last eight months. The advance gets high points for consistency, but low points for momentum. Even though the Dollar has plenty of its own problems, it looks good relative to the Euro. Keep in mind that FOREX is not an absolute game, but rather a relative game. On the price chart, the US Dollar Fund (UUP) is challenging the April highs. After a move from 21.77 to 22.22, the ETF is getting short-term overbought and could be poised for a pause. I am setting first support at 22.215 and key support in the 21.875 area for now.
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Oil fell off a cliff the last two weeks and remains quite oversold. Nevertheless, weakness in global equities, strength in the Dollar and a rise in oil inventories continue to weigh. Demand and supply issues are hitting crude at the same time. The Energy department reported that US stockpiles hit their highest level since 1990 this week and average demand for fuel is edging lower. On the price chart, the US Oil Fund (USO) is oversold and the December low marks possible support around 36, but there are no signs of strength. Broken supports in the 38.5-38.75 area turn into key resistance.
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The nine-day advance in the Dollar clearly weighed on gold, which fell around 5% the last two weeks. Continued strength in the Dollar and weakness in stocks would be negative for bullion, even though it is oversold. Broken supports in the 158-158.5 area turn into first resistance. 20-period RSI resistance remains in the 50-60 zone. The Silver Trust (SLV) is underperforming GLD and this suggests relative weakness in industrial metals, which is also negative for the economic outlook.
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Key Economic Reports:
Fri - May 11 08:30 – Producer Price Index (PPI)
Fri - May 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.
