Art's Charts

Swinging from Risk Off to Risk On

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The markets moved from risk-off mode last week to risk-on mode this week. Perhaps the markets are like the weather. Don't like the trend? Wait a day or two and it will change. Trading has been quite volatile the last few weeks and we could see another mood shift. Strength in the finance sector and housing industry is keeping the S&P 500 ETF (SPY) afloat. In addition, the Euro broke out over the last two days and safe-haven treasuries fell sharply. Weakness in the Dollar and in treasuries is bullish for stocks. Despite this move to risk-on, oil flattened out over the last few days and failed to breakout. As the PerfChart below shows, oil is acting more like a risk-off asset than a risk-on asset.

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Even though stocks surged over the last three days, the S&P 500 ETF (SPY) remains stuck in a consolidation and near resistance from the prior peaks. The swing within the trading range is up, but upside could be limited because of this resistance zone. Also note that the technology sector is severely underperforming and small-caps have been relatively weak since mid September. At what point does this upswing reverse? Chartists can look at a 10 or 15 minute chart to analyze this week's uptrend. Adding a little volatility buffer, I would suggest that a move below 145 would reverse this upswing and possibly open the door to a bigger support break in the 142.80 area.

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121018qqqi

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The swings in the 20+ Year T-Bond ETF (TLT) have become quite large over the last few weeks. The dotted gray line is the 3% zigzag. There have been three swings greater than 3% in the last three weeks. After plunging in early October, the ETF rebounded with a surge back above 124.50 last week. Another plunge below 121 followed this surge and the short-term trend is down again. The five day trend line and broken support combine to mark a resistance zone in the 122-122.50 area. Look for a break above this level to reverse the current downswing.

121018tlti

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The US Dollar Fund (UUP) is also proving a volatile beast during October. The ETF hit resistance in the 21.95 area last week and fell sharply the last six days. The big trend is down on the daily chart and the short-term trend is down on the 30-minute chart. The trend line extending down from last week's high and the support break combine to mark a resistance zone in the 21.8-21.85 area. A break above 21.85 is needed to reverse the six day downswing, while a break above 22 is needed to reverse the three month downtrend.

121018upi

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The US Oil Fund (USO) remains with a falling flag breakout, but this breakout is not looking healthy. Even though the Dollar declined and stocks advanced the last three days, USO remains below key resistance and did not react the last two days. A follow through break above 34.75 is needed to complete this trend reversal. I will mark support at 33.25 and a break below this level would signal a continuation of the September decline.

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The Gold SPDR (GLD) rebounded as the Dollar fell this week. However, this rebound is nearing a moment-of-truth already. Notice that broken support turns into resistance in the 170.5 area. Resistance here is further confirmed by the early October trend line. A break above 170.5 is needed to reverse this short-term downtrend.

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Key Reports and Events:   
                                                               
Wed - Oct 17 - 07:00 - MBA Mortgage Index    
Wed - Oct 17 - 08:30 - Housing Starts/Building Permits            
Wed - Oct 17 - 10:30 - Oil Inventories
Thu - Oct 18 - 08:30 - Jobless Claims    
Thu – Oct 18 – 09:00 – EU Summit       
Thu - Oct 18 - 10:00 - Philadelphia Fed
Thu - Oct 18 - 10:00 - Leading Indicators    
Fri – Oct 19 – 09:00 – EU Summit
Fri - Oct 19 -    10:00 - Existing Home Sales

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.
Arthur Hill
About the author: , 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. Learn More
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