Is it really this easy? Does another round of quantitative easing insure higher equity prices over the next few months? Well, the stock market agrees as the major index ETFs hit new highs last week and remain in clear uptrends. Also note that stocks were strong during prior periods of quantitative easing and it is usually not a good idea to fight the Fed. The Euro is also in an uptrend, which favors the risk-on trade. Weakness in the Dollar and strength in the stock market is also providing a boost for commodities. It seems that the trends are firmly entrenched and poised to continue just because of quantitative easing. While I cannot argue with this assumption right now, keep in mind that the current trends are quite overextended and profiting on the obvious is easier said than done. Everything we know and read about is most likely priced into the market already. This could lead to a corrective process in the various trends over the next few weeks.
SPY has been on a tear since late July with a 10% advance in eight weeks. Also note that the ETF is up 5% in September. We do not need a momentum oscillator to know that SPY is short-term overbought and ripe for a pullback. This does not guarantee a correction, but the odds favor some sort of pullback or consolidation soon. Broken resistance and last week's consolidation mark the first support zone around 143-144. Key support remains at 139.8 for now. RSI support is set at 40.
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The 20+ Year T-Bond ETF (TLT) fell off a cliff again in September with a 5+ percent decline in just two weeks. TLT is as oversold as stocks are overbought. Weakness in treasuries is bullish for stocks because money is being made available for riskier assets. Thursday's high marks key resistance just above 123.
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The Dollar suffered its worst two-week decline since January as the US Dollar Fund (UUP) declined around 3%. This is a huge move for a currency. There are two reasons for such weakness. First, confidence in the Euro increased dramatically since European Central Bank president Mario Draghi pledged support for the Euro and European sovereign debt. Second, the prospects and the realization of more quantitative easing are diluting the Dollar. Weakness in the Dollar is helping the stock market and commodities, but the Dollar is seriously oversold and ripe for a bounce, which could weigh on stocks and commodities in the next week or two. On the 60-minute chart, UUP went into a freefall this month and it is difficult to mark resistance, much less support. There is a small consolidation marking resistance in the 22-22.1 area and a bigger consolidation marking resistance in the 22.3-22.5 area.
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The US Oil Fund (USO) continues to benefit from weakness in the Dollar and strength in the stock market. On the price chart, USO broke resistance in the 36.25 area and broken resistance turns into first support. A move back below Thursday's low would negate this breakout. The short-term uptrend would not reverse unless USO breaks below key support from the late August and early September lows. RSI support remains in the 40-50 zone.
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The Gold SPDR (GLD) is as overbought as the Dollar is oversold. GLD is up over 7% from its late August lows near 160. The ETF broke falling wedge resistance in late September and flat flag resistance last week. The flag lows mark first support at 167. A move below this level would clearly negate the flag breakout and argue for a deeper pullback. The late August low marks key support at 159.
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Key Reports and Events:
Mon - Sep 17 - 08:30 - Empire Manufacturing
Tue - Sep 18 – 07:30 – FedEx Earnings
Tue - Sep 18 - 10:00 - NAHB Housing Market Index
Wed - Sep 19 - 07:00 - MBA Mortgage Index
Wed - Sep 19 - 08:30 - Housing Starts/Building Permits
Wed - Sep 19 - 10:00 - Existing Home Sales
Wed - Sep 19 - 10:30 - Oil Inventories
Wed - Sep 19 – 16:15 – ADBE Earnings
Thu - Sep 20 - 08:30 - Jobless Claims
Thu - Sep 20 - 10:00 - Philadelphia Fed
Thu - Sep 20 - 10:00 - Leading Indicators
Thu - Sep 20 - 16:15 – Oracle Earnings
Fri - Sep 21 – 08:30 – Darden Restaurants and KB Home Earnings
Sat – Oct 06 – 09:00 – EU Summit
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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