Markets move to risk-off mode in mid October. Since October 16th, the S&P 500 ETF is down 2.73%, the Euro Currency Trust (FXE) is down 1.7%, the US Oil Fund (USO) is down a whopping 8.16% and the Gold SPDR (GLD) is down 4.03%. The safe-havens, in contrast, are up with the 20+ Year T-Bond ETF (TLT) advancing .45% and the US Dollar Fund (UUP) up 1.47%. Even though the non-farm payrolls beat expectations and the prior months were revised higher, stocks could not hold their early gains on Friday. The surging Dollar could be the culprit here because gains in the greenback favor risk-aversion, which is negative for stocks.
This move to risk-off accelerated on Friday as stocks surged on the open and then fell rather sharply into the close. A number of "outside days" formed as the major index ETFs opened above the prior day's high and closed below the prior days low. The chart above shows a long black candlestick for the Russell 2000 ETF (IWM) on Friday. This candlestick reinforces channel resistance just above 83. IWM still has support in the 81 area, but a break above the upper trend line is needed to reverse the seven week downtrend.
On the 30-minute chart, SPY opened above flag resistance, but failed to hold this breakout and plunged below flag support. Something clearly spooked the market after this strong open. Most likely, the Dollar breakout and post-election uncertain are keeping investors on edge. With the failure at 143, I am going to mark key resistance here. A recovery and break back above this level would show resilience and reverse the short-term downtrend.
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The 20+ Year T-Bond ETF (TLT) has been trending lower since late July and since late September. I am showing a 60-minute chart to highlight the falling channel since late September. The swing within this channel is up with support just below 121.50. Given the weakness in stocks, I would have expected TLT to be above its mid October high by now. But it isn't. A break above 123.50 would be medium-term bullish for TLT and bearish for stocks. Conversely, a break below upswing support would be short-term bearish for TLT and bullish for stocks. We could see a decisive move on Wednesday.
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The US Dollar Fund (UUP) surged to resistance in late October, consolidated and broke out with a surge on Friday. Perhaps the prospects of less quantitative easing triggered this buying binge. An improving economy and labor market put less pressure on the Fed for quantitative easing, which means less Dollar dilution. I am showing a longer 60-minute chart to highlight the magnitude of this breakout, which is medium-term bullish. Broken resistance turns first support in the 21.95 area. Key support is set at 21.85 for now.
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The US Oil Fund (USO) formed a rising flag in late October and broke flag support with a sharp decline on Friday. The flag high now marks first resistance at 32.30. The bigger trend is also down with the September trend line and broken support marking key resistance at 33.50. Oil is under pressure because stocks are weak and the Dollar is strong.
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The Gold SPDR (GLD) got an oversold bounce in late October, but this bounce formed a rising wedge and the ETF broke wedge support on Wednesday-Thursday. Selling pressure surged on Friday as the Dollar broke resistance and stocks moved sharply lower. Broken support and the wedge high mark resistance in the 167-168 area. GLD is oversold because it moved below the lower trend line of the falling channel. This may produce an oversold bounce back to broken support around 165.
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Key Reports and Events:
Mon - Nov 05 - 10:00 - ISM Services
Wed - Nov 07 - 07:00 - MBA Mortgage Index
Wed - Nov 07 - 10:30 - Oil Inventories
Thu - Nov 08 - 08:30 - Jobless Claims
Fri - Nov 09 - 09:55 - Michigan Sentiment
Tue - Nov 06 - 08:00 - Election Day
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.
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The 20+ Year T-Bond ETF (TLT) has been trending lower since late July and since late September. I am showing a 60-minute chart to highlight the falling channel since late September. The swing within this channel is up with support just below 121.50. Given the weakness in stocks, I would have expected TLT to be above its mid October high by now. But it isn't. A break above 123.50 would be medium-term bullish for TLT and bearish for stocks. Conversely, a break below upswing support would be short-term bearish for TLT and bullish for stocks. We could see a decisive move on Wednesday.
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The US Dollar Fund (UUP) surged to resistance in late October, consolidated and broke out with a surge on Friday. Perhaps the prospects of less quantitative easing triggered this buying binge. An improving economy and labor market put less pressure on the Fed for quantitative easing, which means less Dollar dilution. I am showing a longer 60-minute chart to highlight the magnitude of this breakout, which is medium-term bullish. Broken resistance turns first support in the 21.95 area. Key support is set at 21.85 for now.
**************************************************************************
The US Oil Fund (USO) formed a rising flag in late October and broke flag support with a sharp decline on Friday. The flag high now marks first resistance at 32.30. The bigger trend is also down with the September trend line and broken support marking key resistance at 33.50. Oil is under pressure because stocks are weak and the Dollar is strong.
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The Gold SPDR (GLD) got an oversold bounce in late October, but this bounce formed a rising wedge and the ETF broke wedge support on Wednesday-Thursday. Selling pressure surged on Friday as the Dollar broke resistance and stocks moved sharply lower. Broken support and the wedge high mark resistance in the 167-168 area. GLD is oversold because it moved below the lower trend line of the falling channel. This may produce an oversold bounce back to broken support around 165.
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Key Reports and Events:
Mon - Nov 05 - 10:00 - ISM Services
Wed - Nov 07 - 07:00 - MBA Mortgage Index
Wed - Nov 07 - 10:30 - Oil Inventories
Thu - Nov 08 - 08:30 - Jobless Claims
Fri - Nov 09 - 09:55 - Michigan Sentiment
Tue - Nov 06 - 08:00 - Election Day
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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