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posted on 05 October 2016

Cusp Of Volatility

by Jim Welsh

Macro Tides Technical Review 04 October 2016

The S&P has been trading in a narrow range since early September and is approaching the apex of a small triangle (converging red trend lines, see below). My guess is that the S&P will break out before the end of the week.

quaking.water.380x220

If it is to the upside, the black trend line should provide resistance and limit the upside to 2215 or so. What’s interesting is that the S&P has been forming a much larger wedge triangle formed by the high in May 2015 and the low in February. The lower band of this triangle is defined by the blue rising trend line under the S&P, which comes in around 2120. This coincidence is important since the low in September was 2119 on September 12.

I continue to expect the S&P to break below the trend line and September low. If it does break down, a decline to 2050 - 2070 should follow quickly.

Click on any chart for larger image.

welsh.tech.2016.oct.04.fig.01

There are more than 140 million people working in the U.S., and this Friday the Labor Department we will learn how many jobs were created in September. The consensus is for an increase of 175,000 jobs. I have no idea what the number will be, and note that the employment number is one of the most revised data sets. We really won’t ‘know’ how many jobs were created in September 2016 until the Labor Department does its annual revision next March. With 140 million workers, being off by 0.1% represents 140,000 jobs.

My guess is that the number will be strong enough to convince markets that the odds of the Fed raising rates at the December meeting will increase. A review of oil, gold, Dollar, the 10-year Treasury yield, Dollar, and the Yen suggest the markets are set up for an increase in volatility.

The S&P was on the verge of breaking down last week before it was rescued by a big rally in oil stocks, after OPEC announced it had come to an agreement to cut OPEC oil production by 700,000 barrels a day. I did not expect OPEC to cut production, and as they say, the devil is in the details. Although OPEC announced it would cut production, the actual details won’t be formalized until they meet again in November.

One reason any agreement was achieved was Saudi Arabia’s willingness to allow Iran to increase its production, even as the Saudi’s and other OPEC producers cut their production.

Since hardly anyone expected anything of substance to come out of last week’s meeting, short positions in oil were taken in anticipation of a decline in oil after the meeting ended with no agreement. When the opposite occurred, short positions had to be covered and some buying resulted from those who think OPEC will follow through in November. Oil rallied by more than 7% after the announcement, and this morning traded over $49 a barrel. I think the rally probably ended this morning or will with oil topping below $50 a barrel. If correct, oil will decline to under $45 in coming weeks.

welsh.tech.2016.oct.04.fig.02

In the September issue of Macro Tides I wrote:

“I think the odds favor gold eventually breaking below $1310.70, even if it first bounces back up to $1360 in coming weeks."

Gold rallied to $1357 in early September and today has plunged below $1310 with gusto. Gold is likely to establish a significant trading low in coming weeks between $1210 and $1258, which was the low just before the Brexit vote.

welsh.tech.2016.oct.04.fig.03

In the September Macro Tides I said:

“I expect the Dollar to push above the high at 97.50 and potentially reach 98.50."

Today the Dollar has broken above the prior two highs, and if it can close above 96.50 soon, the rally to above 97.50 could follow quickly.

welsh.tech.2016.oct.04.fig.04

In the September 19 Weekly Technical Review I assessed the potential for the 10-year Treasury yield to increase in coming weeks:

“The yield on the 10-year Treasury bond appears poised for a breakout above the blue horizontal line, although there is a gap at 1.635% that might get filled first. Either way, I think the 10-year yield is headed for 1.85% - 1.90%. Longer term, a test of the long term green down trend line, which connects the highs in 2007, 2013, and 2015 near 2.0%, is coming. As you can see, the 10-year yield has already broken out of the downtrend on the Major Trend Indicator, which suggests the path of least resistance is up. That said, the increase in the 10-year Treasury yield will resemble a tortoise."

welsh.tech.2016.oct.04.fig.05

The yield did close the gap at 1.635% and has today convincingly turned higher. It is likely to reach 1.85% soon.

In the September 19 WTR I discussed the Yen and how it might react to the BOJ’s announcement. I thought the key point was how the Yen responded to whatever the BOJ announced. If the Yen failed to exceed the mid August high and then closed below 0.9580, it will mark the first time the Yen has made a lower high and a lower low in many months, and represent a trend reversal in the Yen.

So far, the Yen has failed to exceed the August high, and looks headed for a close below the early September close on the December futures contract, which corresponds to the 0.9580 on the Yen cash.

As I noted in the September 19 WTR, a meaningful decline in the Yen would likely spark a good rally in the Nikkei. If the Nikkei closes above 17,100 a move up to 17,500 is likely. A close above 17,750 would open the door for a rally to near 20,000.

welsh.tech.2016.oct.04.fig.06

Tactical S&P Sector Rotation Portfolio Model: Relative Strength Ranking

The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator. As long as the MTI indicates a bull market is in force, the Tactical Sector Rotation program is 100% invested, with 25% in the top four sectors. When a bear market signal is generated, the Tactical Sector Rotation program is either 100% in cash or 100% short the S&P 500.

The Major Trend Indicator generated a bear market signal on January 6, when the S&P closed below 1993, and was confirmed on January 14. The Tactical Sector Rotation program went 100% short when the S&P closed at 1990.26 on January 6. The short position was reduced to 50% on February 8 when the S&P closed at 1853, further lowered to 25% early on February 24 as the S&P traded under 1895, and closed on February 25 when the S&P was 1942. The S&P’s average ‘cover’ price on the short trade was 1885.75. The short trade earned 5.2%.


Past performance is no guarantee of future results.


The MTI crossed above its moving average on February 25, generating a bear market rally buy signal. The MTI confirmed a new bull market on March 30.

The Major Trend Indicator has continued to weaken which supports the potential of a decline in the S&P to 2050 - 2070. As discussed last week, a decline to 1200 on the Russell 2000 seems likely.

welsh.tech.2016.oct.04.fig.07

welsh.tech.2016.oct.04.tactical.table

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