Fed Day – Needs More Evidence Inflation is Easing

Tom Gentile

Posted in
Newsletter

By: Tom Gentile
April 10th, 2024

6 mins read
Fed Board

Today FOMC Chairman Jerome Powell spoke at the Stanford policy conference economic forum.

With the second quarter getting off to a sluggish start the markets were looking forward to what Powell had to say regarding their stance on an interest rate cut or interest rate cuts.

What will they do regarding interest rates: Will they cut? How many times will they cut this year? WHEN will they cut?

The gist of what he said as I take it is He and the Fed are going to need to see more evidence (more data) that speaks to inflation weakening (getting closer to their 2%) before they consider or start cutting rates.

The markets weren’t too rattled nor that happy about that assertion as it hasn’t cranked higher or dropped too much lower on the day.

Market in Focus: USO – United States Oil Fund, LP

United States Oil Fund, LP chart

Checking in on USO a month or so into the seasonally bullish pattern for Oil and Energy

My 2024 Oil and Energy Opportunities Report I posted to my site https://tomstradingroom.com/ educated people on the successful, historical bullish pattern on Oil and Energy. I use the USO as the de facto ticker and security to track, because it is its success that is the basis for option trade opportunities I consider on it and other oil stocks over the 5-month period of time mid-Feb. to mid-July.

The yellow box is the move USO has made thus far in 2024 from start date 2024-02-14 to present. It may be closing on overhead resistance, but we like the move it has made thus far.

If we get a pull back we may see a set up for another opportunity on it – we’ll keep you posted.


From the Desk of a CMT – Identifying Opportunities Using Trend & Momentum

It’s second nature for me to seek out relatively strong or weak securities as a first step towards seeking bullish or bearish (respectively opportunities.

As a persistent reminder, a relatively strong stock or ETF is not necessarily bullish – you need to assess conditions with other tools.

The same applies to relatively weak names and a bearish assumption (don’t do it).

The next couple of articles will provide a progression for you to assess a group of ETFs once past the relative strength assessment.

Step 1. Objectively identify ETF trend direction

Moving averages (MAs) are also used regularly to objectively identify the direction of the trend over short, intermediate, and long-term horizons, typically defined by the 20-day, 50-day and 200-day MAs. 

Step 2. Assess the ETF’s trend strength

The ADX indicator provides information about the trend’s strength. The indicator calculations are a bit complex but the tool application straightforward.

Step 3. Assess the state of the trend

Momentum tools such as the rate of change (ROC) can provide confirmation or warnings about the state of an existing trend.

ADX

The Average Directional Index (ADX) can be used on its own or with some of its components, specifically +DI (upward directional movement) and -DI (downward directional movement).

Key areas of movement for the ADX are 20 and 40, with readings below 20 suggesting a weak trend and readings above 40 suggesting a strong trend. Some general guidelines for the ADX movement are summarized here:

ADXAction StrengthMarket
Rising line below 20Very WeakTrending
Rising line moving up above 20StrengtheningTrending
Rising line moving up above 40Very StrongTrending
Divergent line falling below 40*WeakeningTrending
Falling line below 40n/a“Trendless” Sideways
Falling line below 20n/a“Trendless” Sideways
ADX Summary

* Because a rising ADX signals a trending period, either upward or downward, a divergent ADX line is one that is falling while price is rising or falling when price is declining. 

The ADX should be used in conjunction with other technical tools.

However, consider the benefit of an indicator that provides you with unbiased insight into the strength of a trend. Like other tools in technical analysis, there are no guarantees, but it represents a nice sanity check when we are evaluating the health of a trend.

Returning to XLE and XLF, figures 1 & 22 provide a daily chart with exponential MAs (heavier weight on most recent prices), ADX, and ROC.

XLE with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7)
Figure 1: XLE with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7)

Note Integrated Investor includes the ADX line in its DMI indicator. 

XLF with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7)
Figure 2: XLF with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7)

The second chart is a great example of a divergent ADX will the ETF remains in a trending mode. If you were to use stringent exit rules based on a specific ADX level or a decline in ADX, you’d cut short your gains in XLF.

Figure 3 provides an enlarged XLF chart view of the initial bullish trend transition.

XLF with EMAs, ADX, and ROC
Figure 3: XLF with EMAs, ADX, and ROC

In August the bearish trend is weakening, and consolidation occurs before two more move downwards occur.

The mid-November turn in ADX is now associated with an emerging bullish move after price surpassed each of the EMAs.

By December, the most bullish set-up is in place, 

Price > shortest EMA > intermediate-term EMA > longest EMA.

Note the single break of price below the EMA was accompanied by a diverging ROC that dropped below 1.

This would have been a nice profit-taking signal, but what would get you back in the position? Would you be able to get back in after price moved back above the EMA and ROC moved back above the 1 level? How would you manage the declining ADX and sideways ROC?

It’s reasonable to think you will encounter ETFs and stocks that are already in an existing trend so the questions above also apply to entering a completely new position if you found this opportunity in January.

The XLE chart in March looks a little like XLF in December – at the start of a nice bullish move with a widening gap between +DI and -DI.

The change in trend occurred from trendless (ADX below 20 for more than two months) to bullish, which is easier to assess.

Figure 4 provides an enlarged view of recent movement for XLE.

There seems to be a bit more volatility in ROC from Nov – Jan. -DI is subsiding in both charts right before the trend strengthens above 20, but the +DI action is different in the two.

You can’t look at ADX in a vacuum. Get familiar with the component tools as well as price and momentum tools that will supplement your analysis.

Even if you’re familiar with ADX try to think about it a little differently.

What if you added an assessment of ADX simply as a checklist item before entering a position? Does it make sense for your style?

XLE with EMAs, ADX, and ROC
Figure 4: XLE with EMAs, ADX, and ROC

The ROCs for these two charts also provide good variety and the sideways action for XLF’s in an intact trend may make it more uncomfortable to stay in a position. 

A good way to get more comfortable with your assumptions about certain tools is to track the tools live. If you have an opportunity, set up XLE and XLF using the same indicators and think about the types of alerts and signals that could be generated by the combination of tools.

Regards,
Clare White, CMT


Thank you, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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