Written by Jim Welsh
Macro Tides Weekly Technical Review 05 November 2018
From its high of 2941 on September 21 the S&P 500 peeled off 337 points before bottoming at 2603 on October 29. The decline certainly looks like a 5 wave decline from the 2941 high which suggests that the low of 2603 is likely to be tested in coming weeks.
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The road map is likely to follow how the S&P 500 traded after the 21 day percent of net Advances minus Declines dropped well below the threshold of -15.0% (green horizontal line) in August 2015, January 2016, and February 2018. In the three prior instances, the S&P 500 enjoyed a decent counter trend rally (3 weeks, 2 weeks, 6 weeks), before falling again to test the initial low in September 2015, February 2016, and March 2018.
The rebound from the low on October 29 has lasted 5 trading days so it is likely to last a bit longer. The pattern of the rebound is also likely to be similar and form an up wave a, down wave b, and up move wave c, before the S&P 500 falls under 2650 for the retest of the October 29 intra-day low of 2603 and close of 2641.
Click on any chart below for large image.
The rally from the low of 2603 carried the S&P 500 up 153 points to 2756 on Friday morning and may represent wave a. A 50% retracement of wave a would allow the S&P 500 to fall 76 points to 2680, while a 61.8% retracement would bring the S&P 500 down to 2660 and complete wave b. If the S&P 500 falls below 2635, the odds would increase that the counter trend rally finished at Friday’s high of 2756.
If the S&P 500 pulls back to 2660 – 2680 in the next few days and reverses higher, wave c would be expected to be almost equal to wave a or 153 points. A 153 point rally from 2660 would target the high for wave c at 2813 and 2833 if the wave b low is 2680.
A 50% retracement of the 337 point decline from the high on September 21 to the low on October 29 would allow the S&P 500 to rally back to 2770 while a 61.8% retracement would lift the S&P 500 to 2811. The high on Friday is not far from 2770 so it’s possible the initial rebound from 2603 ended on Friday morning. More likely the rally to 2756 is just wave a of a larger upward correction that consumes more time as discussed.
In August 2015 the percent of stocks above their 200 day average fell to 13%, 15% in January 2016, 38% in February 2018, and 22% in October 2018. Obviously, the internal strength of the market was weaker in August 2015, January 2016, and October 2018 than it was in February 2018 when 38% of stocks were still above their 200 day average. From the August 2015 low, the S&P 500 retraced 57.3% of its initial decline and only 44.7% after the January 2016 low.
When the market’s internal strength was stronger in February 2018, the S&P 500 recovered 79.1% of the initial decline. Since the percent of stocks above their 200 day average was much weaker than in February 2018 (22% vs. 38%), it seems less likely that the S&P 500 will have the internal energy to retrace anything close to 79.1% of its recent 337 point drop.
Although it is likely a retest of 2603 – 2641 will be successful, it may fail just as the test of 2710 failed. A 25% short position in an inverse S&P 500 ETF (SH) can be established if the S&P 500 trades up to 2790 and increased to 50% if the S&P 500 trades up to 2805, using 2865 as a stop. If these trades are triggered and the S&P 500 subsequently falls below 2650, the stop should be lowered to 2710.
If the 337 point decline is not wave A but instead wave 1 of a much larger decline, the S&P 500 has the potential to experience another decline of 337 points, after the retracement rally runs out of gas. For this to occur, President Trump’s meeting with China’s President Xi will be just as fruitful as Trump’s Tweet about his conversation with Xi on October 31. The EU and Italy may not be able to reach a compromise on Italy’s 2019 budget, which could lead to a big increase in Italian bond yields, a sharp decline in the Euro, and rally in the Dollar.
Dollar
As expected, the Dollar did exceed the August 15 high of 96.98 when it rose to 97.20 on October 31. It then reversed and fell to 95.99 on November 2. The decline from the August 15 high appears to be a 3 wave decline (a down, b up, and wave c decline), and the rally from the September 21 low to the high on October 31 is also 3 waves (a up, b down, c up). The reversal from 97.20 is potentially wave 1 of wave c which is likely to bring the Dollar down to 94.00 in coming weeks. The Dollar can be shorted if it trades up to 96.50 using 97.12 as a stop.
Euro
The rally in the Euro from its mid August low to the high on September 24 and subsequent drop to low of 1.1392 on October appear to be three wave moves. As long as the Euro holds above 1.1302, a rally up to 1.173 to 1.18 is possible, especially if the EU and Italy are able to craft a budget compromise in the short term. Traders can buy the Euro at 1.138 using 1.306 as a stop.
Gold
Last week I noted that it was encouraging that Gold continued to hold above $1214. Gold traded down to $1212 on October 31, and closed at $1214.40. This keeps the potential of a rally to $1250 – $1265 alive. Any close below $1206 would promptly lead to a test of $1180. Positioning in Gold futures suggests that a major rally is coming to above $1300 and possibly above $1400 in 2019. Short term a test of the July 9 high of $1265 is possible and would probably mark a short term high if it developed.
Gold
Stocks If Gold rallies above $1250, GDX could test $21.00. I would recommend selling 16% of the position at $21.00.
Treasury Yields
The strong increase in jobs and wage gains pushed Treasury yields up on November 2. During the first Taper Tantrum in 2013, the 10-year Treasury yield rose by about 1.30%. From the low of 1.32% in July 2016, the 10-year Treasury yield increased to 2.62% in March 2017, an increase of 1.30%. From the September 2017 low of 2.037%, an equal rise of 1.30% suggests the potential for the 10-year Treasury yield to climb to 3.33% before the potential of another trading low is possible. At a minimum a test of the trend green trend line connecting the high yield in May (3.115%) and October (3.248%) would lift the 10-year yield up to 3.28%.
If wave 1 from 2.925% and wave 5 are equal, the 30-year Treasury yield can rise to 3.52%, slightly above the green trend line connecting the May high (3.247%) and the early October high at 3.424%.
After the employment report on November 2, Treasury yields spiked higher. The Treasury ETF TLT closed at $112.00 which was a bit lower than the close of $112.66 on October 8. However, TLT’s RSI was 31.1 on November 2 compared to 22.3 on October 8. This is a positive divergence and suggests a trading low may be fast approaching. TLT may also be completing a 5 wave decline from its high in early July, which suggests a counter trend rally is possible.
A positive RSI divergence occurred at the February trading low and again in May. Traders can establish a 50% position at $111.75 using a stop of $110.50. If the S&P 500 does not hold 2603, a waterfall decline could propel Treasury yields lower. In that scenario, TLT could trade up to $117.00 (red trend line), which is wave 4 of lesser degree.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The Sector Relative Strength Ranking is based on weekly data and used in conjunction with the Major Trend Indicator (MTI). 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 MTI crossed above its moving average on February 25, 2016 generating a bear market rally buy signal. Based on the buy signal, a 100% invested position in the top 4 sectors was adopted. The MTI confirmed a new bull market on March 30, 2016 which is still in effect. Past performance may not be indicative of future results.
The MTI has weakened significantly since early October. At the opening on November 6, the U.S Sector Rotation Portfolio will be moved 33% into cash/money market, and moved 100% into cash/money market fund if the S&P 500 closes below 2635. If the S&P 500 rallies above 2760, the U.S Sector Rotation Portfolio will be moved to a 66% cash position and a 100% cash position if the S&P 500 subsequently closes below 2700. If the S&P 500 moves above 2800 the U.S Sector Rotation Portfolio will moved to a 66% cash position, and a 33% short position in an inverse S&P 500 ETF (SH).
Disclosure
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an inde
