The market started the week in risk-on mode, but made a sharp u-turn on Thursday with a move to risk-off. The major index ETFs were down sharply with small-caps (IMW) and mid-caps (MDY) leading the way. Both lost over 2.5% on the day. All sectors were down with the Energy SPDR (XLE) plunging over 4% and the Basic Materials SPDR (XLB) falling over 3%. Homebuilders, which led the market higher from January to April, fell sharply as the Home Construction iShares (ITB) lost over 3% and the Homebuilders SPDR (XHB) declined 4.62%. It was a strong decline that pushed almost all boats under water.
I would not blame Thursday's decline on rumors that Moody's was going to downgrade a slew of banks. Even though these rumors were true, credit rating agencies are never ahead of the curve. Moody's is basing these downgrades on past data and not looking forward. Otherwise, the downgrades would have been more severe. Those looking for a reason can point their finger at the Fed's muted policy response to weak economic data. Note that Jobless Claims were above expectations and the Philly Fed report was below expectations. Outside the US, the German flash PMI moved to its lowest level in 36 months. It is also below 50, which suggest contraction in Germany, the powerhouse of Europe.
The moment-of-truth arrived with Wednesday's close and the bears took control. As noted earlier this week, the major index ETFs were all trading near their 61.80% retracement lines and forming rising wedge patterns. While the patterns are typical for bear market rallies, the trend is up as long as the wedge rises. The first bearish signals were triggered yesterday when the major index ETFs broke support from Wednesday's low. On the SPY chart, the ETF broke below the lower trendline of the rising wedge and RSI moved below 40 for the first time since early June. The decline started strong and finished strong, which is also bearish. Broken support around 134.2 turns into the first resistance level to watch.
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No change. Is operation twist enough to do the trick? The Fed admitted that economic growth and employment growth were slowing, but still opted for a relatively muted response. By selling shorter maturities and buying longer maturities, the Fed hopes to push long-term rates lower. The market is not impressed. The 20+ Year T-Bond ETF (TLT) opened weak with a support test and then bounced off support with a rather strong move. This reinforces support and the big trend remains up. This means the big trend for rates is down. These trends are negative for stocks.
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SPY advanced to its 61.80% retracement and reversed down. The US Dollar Fund (UUP) declined to its 50% retracement and reversed up. UUP formed a falling wedge and broke wedge resistance with a big surge on Thursday. This move signals a continuation of the June advance and the medium-term uptrend. I adjusted RSI back to 20 periods because this captures the swings better. RSI broke above 60 to confirm the trend reversal on Thursday.
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No change. The US Oil Fund (USO) cannot hold a bid to save its life. The oil market was slammed by a report showing US inventories reaching a 22 year high. A less aggressive Fed also weighed on oil. USO broke support to signal a continuation of the downtrend. This move reinforces resistance at 32. Even though stocks and the Euro had their own risk-on party in June, oil did not partake and the risk-on trade was incomplete. Weakness in oil is negative for stocks and positive for treasuries.
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Gold is clearly part of the risk-on trade: it rises when stocks and the Euro rise, but falls when stocks and the Euro fall. The Gold SPDR (GLD) surged off support in early June, but follow through was muted and the ETF formed a lower high around 158. After a short-term support break on Wednesday, GLD continued lower Thursday and broke support at 153. This is a failed breakout. RSI broke below 40 to confirm the short-term downtrend. Also notice that the Silver Trust (SLV) broke support and even moved below its May low.
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Key Reports and Events:
Fri - Jun 22 - 10:00 – Merkel, Hollande, Rajoy and Monti Meet
Mon - Jun 25 - 08:30 – Supreme Court Healthcare Ruling?
Sun - Jun 28 - 10:00 – 2-day EU Summit
Thu - Jul 25 - 10:00 – European Central Bank Policy Statement
Charts of Interest: Tuesday and Thursday
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.
About the author:
Arthur Hill, 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.
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