Written by Jim Welsh
Weekly Technical Review 28 September 2020
Dominoes Fall and Have Oversold Bounce
In last week’s WTR entitled “Market Dominoes Begin To Fall” I discussed how the Euro, Gold, and Silver were set to break below their respective support levels, while the Dollar was in the process of breaking above its resistance. The action on September 21 was the exact opposite of what had happened on July 21 when the Euro, Gold, and Silver broke above resistance as the Dollar was falling below support.
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As such I noted that:
“It’s possible that September 21 may provide a bookend to July 21. It’s rare to see so many markets pivot on the same day and subsequently move so far in such a short period of time.”
This synchronization continued as the Euro, Gold, and especially Silver became oversold late last week as the Dollar reached a modestly overbought level. The RSI for the Euro and Gold dipped under 35 while Silver’s RSI dropped below 30. The quick sharp decline set up these markets for an oversold bounce, which continued on September 28.
The Euro fell from 1.20 to near 1.16 so a rebound to 1.175 – 1.18 and the range of the prior support line seems likely. After this short term rally the Euro is expected to drop below 1.16 and could test 1.147, which is the price level it broke above on July 21. The expectation was that Gold would fall below $1900 and tumble below $1869 and potentially below $1820. Gold quickly fell to $1849 after breaking below $1900, and bounced to $1882 on September 28.
Gold is expected to dip below $1849 and potentially test the rising trend line near $1830. Investors can go 50% long (whatever the normal allocation) the Gold ETF (IAU) if/when Gold trades under $1849. Increase it to 100% if/when Gold trades under $1820.
Silver
In the September 14 WTR I noted that stop loss orders were likely to lead to an accelerated decline once Silver fell below $26.00:
“A close below $26.00 should trigger stops and lead to a quick drop to $24.00 and could possibly near $22.00.”
On September 24 Silver spiked down to $21.78, and after bouncing off its rising trend line of support, closed at $23.15.
Last week investors were advised to
“go 50% long the Silver ETF (SLV) (whatever the normal allocation) if/when Silver trades under $23.72, and increase it to 100% if/when Silver trades under $23.00.”
Silver traded below $23.72 in the early morning hours of September 23, so the 50% position in SLV was triggered on the opening of September 23. In the first 5 minutes of trading SLV traded at an average price of $21.86. Silver traded below $23.00 at 11:00 am pst and SLV traded at an average price of $21.34 in the following 5 minutes. The average price of the SLV position is $21.60.
The pattern is Silver is different than Gold, since Silver was far weaker during the recent decline. I didn’t expect Silver to exhibit this much weakness. This difference potentially allows Silver to decline well below the recent low and could bring Silver down to near $20.00 or lower. This changes the risk reward on this trade. Sell half of SLV at the opening of September 29 and the other half if SLV trades up to $22.46. Use a stop of $21.60.
Gold Stocks
The Gold stock ETF (GDX) was expected to fall and it did hit a low of $37.07 on September 24, just above the initial buy recommendation at $37.00 before rebounding. Investors can go 50% long GDX (whatever the normal allocation) if/when GDX trades under $37.00. (Black horizontal trend line) Increase it to 100% if/when GDX trades under $35.20. (Just above red horizontal trend line.)
Stocks
In the September 4 WTR the expectation was that the S&P 500 would break below 3350 and make a run at 3200:
“The decline to 3350 and subsequent bounce off 3350 reinforces the importance of that level of support. The expectation is that the S&P 500 will break below 3350 and fall to near 3200 (blue trend line).”
The S&P 500 dropped to 3209 on September 24 before bouncing. From its high of 3588 the S&P fell 379 points before bottoming on September 24. On September 28 the S&P 500 rallied to 3360 just beyond the 38.2% retracement of the decline. A 50% recovery of the decline would target a rally to 3398.
The third quarter ends on Wednesday so the stock market may benefit from some end of quarter window dressing. This quarter could be a bit tricky since equity allocations may need to be trimmed. Growth stocks could be more vulnerable since they have performed well and institutions may want to show they have increased their allocation to cyclically sensitive stocks.
The primary purpose of this rally is to alleviate the oversold condition that developed as the stock market was recording a low just above 3200. The 21 day Advances minus Declines Oscillators for the NYSE and Nasdaq became more oversold than at any time since April.
The Nasdaq 100 peeled off 1761 points after falling from 12439 to 10678 on September 21. The 38.2% retracement would target a rally to 11350, which was reached on September 28, and possibly up to 11558, if the Nasdaq 100 recovers 50% of the decline.
The rebound in the market is likely to take an A-B-C form, with the high of Wave A occurring soon, followed by a pullback. Wave C could then lift the S&P 500 and Nasdaq 100 up to the 50% retracement targets.
The wild card is whether Congress does manage to pass another stimulus bill. Since few expect it, passage of more fiscal stimulus would catch those short off guard and allow the market averages to reach the 61.8% retracement levels. (S&P 500 3444 – Nasdaq 100 11767) The recent decline encouraged institutions to hedge their portfolios by shorting equity futures to the highest level in at least 10 years.
In contrast options traders are still buying call options and the 10-day average of the Call/Put ratio remains well above the level normally associated with a solid trading low (Green horizontal line). The rebound will only encourage more Call buying.
Once the current rally runs out of gas, the S&P 500 has the potential of falling to 2950 – 3000 in November.
Treasury yields
Treasury yields continue to trend sideways as they have since April 9. If the S&P 500 does manage to decline below 3100 and approach 3000, Treasury yields may have one more dip before the trend reverses higher in a more convincing manner.
At some point I expect the 10-year Treasury yield to close above 0.75% (Green trend line), the 30-year Treasury yield to close over 1.55% (Green trend line), and TLT to drop under $161.00 (Black trend line). When they do it will mean something and likely provide an opportunity to short Treasury bonds.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal when it crossed above the red moving average on April 16 when the S&P 500 closed at 2800. A new bull market was confirmed on June 4 when the WTI rose above the green horizontal line. Although the MTI has confirmed the probability of a bull market, it doesn’t preclude a correction. The expectation has been that the S&P 500 was likely to decline to 3200 and potentially to 2950 – 3000 in the fourth quarter.
The primary 10 sectors for the S&P 500 with the Russell 2000 and Midcap included.
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