Good morning and welcome to this week’s Flight Path. The “Go” trend in equities continued again this past week but we saw some weakness as GoNoGo trend painted a few weaker aqua bars. Treasury bond prices experienced a change in trend as a few bars of “Go Fish” gave way to a purple “NoGo” bar. U.S. commodities painted a full week of strong blue “Go” bars and the dollar also saw strength return with strong blue bars.

$SPY Shows a Little Weakness with Aqua Bars

The GoNoGo chart below shows that price has moved mostly sideways since the last high and the Go Countertrend Correction Icon (red arrow) that came with it. The waning momentum suggested that price may have a hard time moving higher in the short term. GoNoGo Trend has painted a few weaker aqua bars as well and we see GoNoGo Oscillator testing the zero line from above. It will need to find support here and if it does we will be able to say that momentum is resurgent in the direction of the “Go” trend.

On the longer term chart, the trend continues to be strong. However we are seeing the price range shrink as we edge higher. GoNoGo Oscillator is not in overbought territory and seems to be resting at a value of 3. We will watch to see if the oscillator falls to test the zero line perhaps in the next few weeks.

Treasury Rates Return to Paint “Go” Colors

Treasury bond yields reversed course and after consecutive amber “Go Fish” bars that often come as a transition between trends we see the indicator painting “Go” colors again. GoNoGo Oscillator has broken back into positive territory which confirms the trend change that we see in price above.

The Dollar Sees a Return to Strength

The dollar rallied this week with a string of uninterrupted bright blue “Go” bars. Price is approaching resistance from prior highs and we will watch to see if it can continue higher. GoNoGo Oscillator broke back into positive territory and we saw a Go Trend Continuation Icon (green circle) indicating that momentum is resurgent in the direction of the “Go” trend. We will watch to see if this will give price the push it needs to make a new high in the coming days and weeks.

Uncertainty in the stock market makes it difficult to make investment decisions. When investors sell off stocks, everyone follows without giving it much thought and you’re left trying to figure out which path you should take. We saw this price action in the stock market on Wednesday after the Federal Open Market Committee cut interest rates by a quarter percentage point. Investors started to sell their holdings, which intensified toward the last few minutes of the trading day. 

The rate cut didn’t come as a surprise. The market had already priced it in. Fed Chairman Jerome Powell’s comments about slowing down rate cuts for the next two years led to the massive selloff. Inflationary concerns were one reason which may have heightened investor fear. The S&P 500 ($SPX) fell by 2.95%, and the Nasdaq Composite ($COMPQ) dropped by 3.56%. The S&P 600 Small Cap Index ($SML) got hit hard, falling over 4%.

It wasn’t just equities that sold off. Gold prices fell. Silver prices fell. Bond prices fell. Even cryptocurrencies felt the pain. 

So, how damaging was the selloff? Let’s dive into the charts of the broader stock market indexes. 

Equities Hammered Hard

Whenever there’s such a significant fall in equities, it’s natural to think about buying the dip. But before you jump into anything, it’s best to see if the uptrend is still in play. 

From its August low, the S&P 500 has been in an upward trend with a few pullbacks, the deepest one being in early September when it almost reached its 100-day simple moving average or SMA (see chart below). On Wednesday, the index closed below its 50-day SMA toward the low of the day. The daily chart below shows market breadth is declining. 

FIGURE 1. DAILY CHART OF THE S&P 500 INDEX WITH BREADTH INDICATORS. The index is close to hitting its late November lows, a key support level. If it breaks below that level and market breadth indicators continue to weaken, it could be a bearish signal. Chart source: StockCharts.com. For educational purposes.

The NYSE Advance-Decline Line (!ADLINENYC), the percent of S&P 500 stocks trading above their 200-day moving average ($SPXA200R), and the S&P 500 Bullish Percent Index ($BPSPX) are all trending lower. That the $BPSPX is below 50 shows that bearish pressure is dominant, which is concerning. 

The weekly chart is more optimistic in that the S&P 500 is still trending higher and above its 21-week exponential moving average (EMA). All the moving averages on the chart are trending higher.

FIGURE 2. WEEKLY CHART OF S&P 500 INDEX. All moving averages overlaid on the chart are trending higher. The S&P 500 is trading above its 21-day EMA. A break below the EMA would be the first signal of a reversal of a bull market. Chart source: StockCharts.com. For educational purposes.

The takeaway: Watch the November lows in the daily chart (blue dashed line). A close below this level would mean a break in the “higher highs, higher lows” trend. If the $BPSPX continues to decline and the S&P 500 falls below its November low and 21-week EMA, consider offloading partial positions. 

The Nasdaq Composite has a similar pattern in its chart, although it’s still above its 50-day SMA (see chart below). However, what is concerning about the daily chart of the Nasdaq is that it closed at its November high. A break below this level could break the series of higher highs and higher lows depending on how it unfolds. So watch this level carefully.

FIGURE 3. DAILY CHART OF NASDAQ COMPOSITE WITH MARKET BREADTH INDICATORS. The Nasdaq has reached its November high. Market breadth indicators are weakening. Keep an eye on this chart. Chart source: StockCharts.com. For educational purposes.

The NASDAQ Advance-Decline Line (!ADLINENAS), the percent of Nasdaq stocks trading above their 200-day moving average is at 54% and trending lower, and the Nasdaq Bullish Percent Index ($BPCOMPQ) are all trending lower with the $BPCOMPQ at 50. If you pull up the weekly chart by changing the Period dropdown menu to weekly and using a five-year range, the trend is still bullish, similar to the weekly chart of the S&P 500.

Fear Gauge Is Running Hot

The rise in fear can be seen in the action in the Cboe Volatility Index ($VIX) which closed at 27.62, a 74.04% increase. The chart of the S&P 500 vs. the VIX below shows how big of a move it experienced on Wednesday. 

FIGURE 4. S&P 500 VS. THE CBOE VOLATILITY INDEX ($VIX). Spikes in the VIX are accompanied by a pullback in the S&P 500. Chart source: StockCharts.com. For educational purposes. A spike of such a magnitude occurred in early August, which is when the S&P 500 pulled back and resumed a very optimistic uptrend. 

Despite the spike in the VIX, investors weren’t flocking to “risk-off” investments. Gold and silver prices fell as did cryptocurrency prices. Treasury yields rose with the 10-year yield at 4.494% and the US dollar surged against other major currencies, especially the euro. 

The Bottom Line

Now that the last FOMC meeting for the year is behind us, there’s not much remaining in terms of economic data except the November Personal Consumption Expenditure (PCE) on Friday. There’s also the Santa Claus Rally to look forward to. So if Wednesday’s chaotic price action is an opportunity to buy the dip, i.e., if the indexes reverse without falling past critical support levels, you could make some end-of-year trades that could turn profitable as we head into the new year.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The Yield Curve

The RRG above shows the rotations of the various maturities on the US-Yield Curve.

What we see at the moment is that the shorter maturities like BIL, SHY, and IEI are in relative uptrends against GOVT which means that the accompanying yields are being pushed lower.

The longer maturities, all inside the lagging quadrant, are in opposite moves and their yields are being pushed higher.

The result of such a rotation is a so-called “steepening” of the yield curve.

This chart shows the 10-2 yield curve. 10-year yield minus 2-year yield. In a normal situation, longer-dated maturities carry a higher yield than shorter-dated maturities. For almost 2.5 years this was not the case in the US. The negative values in the chart above indicate an “inverted” yield curve. This has happened a few times in the past but it is considered non-normal.

The recent rise of the 10-2 difference above 0 indicates a return to normal for the US yield curve.

Another way of showing the move of the yield curve is by using the Dynamic Yield Curve tool on the site. Here are three snapshots of the YC move since mid-2022.

This visualization shows the love of the entire curve. It not only shows the steepening vs flattening move but also the rise of the total curve of around 2% from just above 2% to over 4.5% currently.

The Relative Rotation Graph showing the rotations of the various maturities will help investors to keep track of the steepening/flattening move.

The US Dollar

The RRG for the G10 currencies, using the USD as the benchmark, shows a picture that could not be more clear.

The USD is the strongest currency at the moment.

All currencies in this group are, moving further, inside the lagging quadrant, indicating downtrends against the USD which is the center of the RRG.

This is a pretty massive move showing the strength of the USD against all other currencies.

On the EUR/USD chart, we can see a test of a major support level of around 1.03.

Once that support breaks, the way down is wide open towards the 0.96 area where the market bottomed out in 2022.

On the flip side. When support holds and EUR/USD can take out 1.06 we will have a completed double bottom targeting the upper boundary of the current range.

Looking at the $USD index chart, which is the USD expressed against a basket of currencies, we see that an upward break has already taken place. Taking this as a lead suggests that the odds are tilted in favor of a downward break in EUR/USD.

Sectors and SPY

Despite the big drop earlier this week, the sector rotation on the weekly RRG has not drastically changed (yet). So far the strength for XLC and XLY remains present. Only XLF has rolled over but remains inside the leading quadrant.

A similar observation can be made on the daily version of this chart.

On the weekly chart of SPY, the price has dropped back to a double support area around 585 where the rising support line meets horizontal support coming off the October high.

So far this all remains within “normal behavior” for an uptrend.

When SPY breaks that double support level and leaves the channel a re-assessment of the situation is needed.

#StayAlert and have a great weekend — Julius

When running my StockCharts Technical Rank (SCTR) scan on Thursday, I was a little surprised to find that 75 exchange-traded funds (ETFs) and large-cap stocks made the cut, especially after Wednesday’s selloff. It was a little ray of hope.

A quick sweep of the list didn’t reveal a particular sector or asset class to be dominant. The stocks and ETFs represented a broad segment of the stock market.

After going through the list, one security that caught my eye was the SPDR S&P 500 ETF (SPY), which closely follows the S&P 500 ($SPX). After the 2.98% drop in the S&P 500 on Wednesday, is SPY still technically strong? Let’s look at the daily SPY chart (see below).

FIGURE 1. DAILY CHART OF SPY ETF. The last two bars in the chart show that SPY is wavering. It’s not breaking below the mid-November lows, yet it doesn’t seem to want to move higher. It is trading below its 50-day moving average, the RSI is indicating slowing momentum, and the S&P 500 Bullish Percent Index is below 50. Chart source: StockCharts.com. For educational purposes.

Since mid-August, the SCTR (pronounced s-c-o-o-t-e-r) score has been hovering between the 70 and 90 levels. It’s now almost at 80. On Thursday, the ETF’s price closed at around the same level as Wednesday’s and is below its 50-day simple moving average (SMA). The relative strength index (RSI) is getting close to its oversold level.

The bottom line is that even though the SPY has a SCTR score of 79, and it hasn’t broken below the mid-November low, the RSI indicates momentum is weak, and the S&P 500 Bullish Percent Index ($BPSPX) is at around 41%, i.e., leaning toward bearishness. 

So, after a selloff like we just had, does it make sense to consider adding long SPY positions at this level? At the moment, the SPY is acting indecisive, but at some point, it’ll have to make a directional up or down move. A reversal with strong follow-through would be a signal to go long. The indicators displayed in the chart of SPY should support the reversal. If, on the other hand, SPY breaks below the mid-November low and the SCTR score falls below the 76 threshold, it would be a signal to unwind some positions. 

This is one chart to monitor as we wind down the year. We’ll see if Santa comes through next week!

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.