Last week we were looking at a rising wedge formation, which we said normally resolves downward. This week price moved through the bottom of the wedge sideways, but that doesn't really qualify as a downward resolution, which would necessarily require price to move, well, down. Friday's price bar does convey a small burst of downward energy, but the two-week trading range remains intact. Regardless of our expectations the market still didn't seem inclined to give up any ground. That could have something to do with the new tax bill -- investors waiting to take capital gains in 2018, when tax rates are more favorable.
The DecisionPoint Weekly Wrap presents an end-of-week assessment of the trend and condition of the stock market (S&P 500), the U.S. Dollar, Gold, Crude Oil, and Bonds.
STOCKS
IT Trend Model: BUY as of 11/15/2016
LT Trend Model: BUY as of 4/1/2016
Daily Chart: It's always a bonus when the end of the week, month and year all occur on the same day, because we get to look at daily, weekly, and monthly charts together. The one-year daily chart shows that SPY advanced about +23% in 2017. We can also see the three ever-steepening trend lines that tell us that a parabolic price rise is in progress. On Friday the trend line was broken, and the daily PMO, having topped earlier in the week, crossed down through the signal line.
Weekly Chart: The fact that price has reached the top of a long rising trend channel is a strong piece of evidence pointing toward the probability of a correction, but, looking at three prior tops in that channel, we can see that there are possible scenarios where pain would be minimized.
Monthly Chart: In this time frame we get to look at the secular bull market, which began in early-2009 and in nine years has advanced +410%. What concerns me on the monthly chart is the massive upside departure price has made from the nine-year rising trend line, and I get the definite impression that price has entered a parabolic zoom. This can't last.
Short-Term Market Indicators: The negative divergences persist, and these indicators are neutral, not oversold.
Intermediate-Term Market Indicators: Negative divergences persist, and two indicators have crossed down through their signal lines. The ITVM has lagged, I think, because of low holiday volume. Plenty of room for a correction.
Conclusion: Positive fundamental events keep rolling out, infusing investors with confidence; however, the P/E for the S&P 500 Index is a rich 25, and that needs to be corrected. The SPY monthly and weekly charts show how overbought the market is relative to the major rising trend lines, and this is my greatest concern in the intermediate-term, technically speaking. The market is overvalued and overbought, and 2018's lower tax rates will provide the opportunity to take some profits. I think that a correction is likely to begin next week.
DOLLAR (UUP)
IT Trend Model: SELL as of 12/21/2017
LT Trend Model: SELL as of 5/24/2017
Daily Chart: In November and December UUP attempted to break above the declining tops line, but it failed both times. This week it began a waterfall decline and is currently challenging the November low. The daily PMO is bearish.
Weekly Chart: The 2016 UUP lows are being tested, and the weekly PMO has topped below the zero line, never a good sign.
Monthly Chart: $USD has broken down from a rising wedge, as expected, and the $USD monthly PMO has topped below the signal line and formed a negative divergence against a higher price top. Very bearish chart.
GOLD
IT Trend Model: NEUTRAL as of 10/20/2017
LT Trend Model: BUY as of 4/12/2017
Daily Chart: Gold has been moving sideways over the last year. I have been looking for a sign that the longer-term rising trend is resuming, but price action off three prior price bottoms, particularly the one in July, has been disappointing. The price advance off this month's low once again looks promising, thanks to the weakening dollar. Sentiment remains bearish, and, if promising price action continues, we want to see sentiment turn green. Unless there is a severe price drop next week, the 20EMA will cross up through the 50EMA (probably Monday), generating a new IT Trend Model BUY signal.
Weekly Chart: This week the weekly PMO turned up, and the rising trend line drawn from the December 16, 2016 low was recaptured. Gold has a 13.5-month cycle, which by my calculations is due to trough late next month, so we can't rule out one more retest low; however, we are close enough to the projected trough that it may have arrived early.
Monthly Chart: After a parabolic rise into the 2011 top, the parabolic broke down and price dropped nearly -50%. Gold hit the bear market low in late-2016, and this year it broke above the long-term declining tops line that defined the bear market. Since that breakout, gold has struggled. Nevertheless, the monthly PMO is still rising above the signal line, and the chart is still bullish.
CRUDE OIL (USO)
IT Trend Model: BUY as of 9/6/2017
LT Trend Model: BUY as of 11/2/2017
Daily Chart: Last week USO was struggling with the top of a triangle/pennant formation. This week price clearly broke out of that formation, and the daily PMO turned up and moved above the signal line. In this time frame it looks as if USO will be moving higher.
Weekly Chart: In this time frame USO has reached the top of a two-year trading range, and the weekly PMO is overbought based upon the five-year range. Nevertheless, USO looks ready to challenge the overhead resistance.
Monthly Chart: The two-year trading range is located well below two important levels of overhead resistance. This will allow for a significant up move before that resistance is encountered. Note the extreme PMO low hit in 2016. Also note that the recent two-year flat price pattern has resulted in the monthly PMO rising at a pretty good clip. This provides a good demonstration of how, absent a price trend, the PMO will move back to the zero line. So it is good that the PMO is rising, but it is not a sign of strength.
BONDS (TLT)
IT Trend Model: BUY as of 11/8/2017
LT Trend Model: BUY as of 6/16/2017
Daily Chart: Last week TLT broke below a rising trend, which confirmed my assessment that a double top formation was in process. This week price recaptured the trend line, weakening the double top argument. That argument isn't completely dead yet, so I have left the appropriate notations in place.
Weekly Chart: We can see some strength in this time frame, but the PMO is running flat, projecting indecision.
Monthly Chart: Switching to $USB, we can see 34 years of price history for the 30-year bond. Starting in 2014, these bonds had a major parabolic blowoff, as price exited a 30-year rising trend channel. The parabolic broke down in 2016, and it is probable that we have seen the major top from which a multi-year decline has begun.
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Technical Analysis is a windsock, not a crystal ball.
Happy Charting!
- Carl
NOTE: The signal status reported herein is based upon mechanical trading model signals, specifically, the DecisionPoint Trend Model. They define the implied bias of the price index based upon moving average relationships, but they do not necessarily call for a specific action. They are information flags that should prompt chart review. Further, they do not call for continuous buying or selling during the life of the signal. For example, a BUY signal will probably (but not necessarily) return the best results if action is taken soon after the signal is generated. Additional opportunities for buying may be found as price zigzags higher, but the trader must look for optimum entry points. Conversely, exit points to preserve gains (or minimize losses) may be evident before the model mechanically closes the signal.
Helpful DecisionPoint Links:
DecisionPoint Shared ChartList and DecisionPoint Chart Gallery
Price Momentum Oscillator (PMO)
Swenlin Trading Oscillators (STO-B and STO-V)
