Key Economic Report that Could Impact Financial Markets This Week

Tom Gentile

Posted in
Newsletter

By: Tom Gentile
March 6th, 2024

6 mins read

Originally published via our newsletter previously. Subscribe for early access!

Image 16

Each month we get economic data that investors and traders alike pore over to help them ascertain a directional bias on the markets.

Whether they use that data to assess direction for the purpose of deciding to add to their investments,  reduce their position size in certain investments in their portfolio or just sit on their hands and wait things out is up to them and their broker / financial professional(s).

One thing we as investors and traders do is look at certain data more than other batches of data to ascertain what we believe the Federal Open Market Committee will do in regard to setting interest rates.

A key economic report due out tomorrow is the PCE. This is the Personal Consumption Expenditure reading for January.

The PCE is one of the main measures of inflation and consumer spending in the U.S. You will read that some claim this to be one of, if not, the preferred piece of data the Fed prefers to use when they measure inflation.

We will see how the markets react once the data is released and if that speaks to a pull back or more highs to come.


Market in Focus: SPY – SPDR S&P 500 ETF Trust

Image 17

Looking at this technically, from a candlestick charting view with no additional indicators or oscillators, there is a potential pattern setup on price alone.

It is called Old Resistance, becomes New Support.

The chart of the SPY shows that a couple of times 500 was a price SPY hit and backed off from a couple times early February.

It then broke out, ran to all-time highs near 510.

What tends to happen with this type price action is the security breaks out to a higher price and then settles back in price to the level it broke out from; in this case should the pattern play out it may dribble back to 500, establish support by trading higher from 500.

From the Desk of a CMT – The Markets

SPY continues to be a widely followed ETF to track market performance of a broad stock basket, despite the heavy influence of some large cap tech names in the market-weighted index It tracks. The top names (NVDA, MSFT, APPL, GOOGL, META, AMZN, NFLX, & TSLA) are no longer firing on all cylinders in unison, but it’s important to acknowledge the current state for the markets viewed through this proxy.

Figure 1 is a daily chart of SPY with a linear regression channel that was selected using SPY’s weekly line chart to capture meaningful lows in the last couple of years. 9/30/2022 is the start date for the channel and 10/27/2023 the end date.

The move up past the upper boundary line is not being confirmed by momentum and volume, but we still need to acknowledge the bullish set-up in place: Price > 20-dy SMA > 50-dy > 200-dy SMA. This is as bullish a set-up as possible and should be acknowledged.

Divergences can remain in place for an extended period and it’s possible, even a correction occurs in SPY, that it’s moderate, allowing the ETF to simply turn the upper channel. Maybe it’s simply best to focus elsewhere?

Figure 1: SPY with Linear Regression Channel (9/30/22-10/27/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)
Figure 1: SPY with Linear Regression Channel (9/30/22-10/27/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)

As usual, a go to is to run a ranker in Tom’s Option Tools on the sector SPDRs to see how things are moving on a relative basis. Tom’s Movers was selected as follows:

Stocks > Stock Rankers > Tom’s Movers

Run on the following group:

XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY, SPY, XLRE, XLC

Note in Figure 2 the scan was run on 2/27/2023 with one setting change, Use Intra Day Stock Data was changed from Yes to No.

Figure 2: Tom’s Mover Rank Criteria
Figure 2: Tom’s Mover Rank Criteria

Only two ETFS met the criteria, neither of which have a correlation with SPY using data from the last year.

Figure 3: Ranker Results on 2/27/2023
Figure 3: Ranker Results on 2/27/2023

When reviewing a weekly line chart to construct a linear channel for XLE, a sideways trend appears the best of the three.

This is also viewed as a sideways trending 200-dy SMA with recent short-term strength viewed in the 20-dy SMA.

There is a slight divergence with momentum and recent volume that supports bullish days. Figure 4 displays the daily XLE chart with no regression channel.

XLU is the bearish case, with a downward trending channel that can be drawn from 10/14/2022 to 10/6/2023 (still low to low).

Figure 4: XLE with ROC (14, 7), Volume, and SMAs (20, 50, & 200)
Figure 4: XLE with ROC (14, 7), Volume, and SMAs (20, 50, & 200)

The ranker has identified the short-term strength in a long-term neutral price trend. Here are some things to consider as you view the chart:

  • What alert would you want to see to deploy a bullish strategy? 
  • Over what time period would you focus and what tools would you use to objectively identify trend and its strength?
  • What sideways strategies fit your style and conditions?

When using SMA trend as objective identifiers for an ETF’s price trend, we have the following:

  • A bullish trend for SPY (short-term, intermediate-term, and long-term),
  • A neutral long-term trend in XLE, with a short-term bullish trend underway and an intermediate term bullish trend emerging,
  • A long-term and intermediate term bearish trend for XLU with a bullish short-term trying to take hold.

With all of these in mind, do you want to play to strength with a bullish SPY strategy, a changing environment for XLE, or a bearish move in XLU with a short-term bullish move that may simply be countertrend?

First, the main point of this article is important: don’t try to call a top when an index is objectively bullish and making all-time highs. There are simply other places to explore. 

XLE: Option traders can think longer-term with XLE if it suits their style by taking advantage of strategies that benefit from sideways price action or risk manage an emerging bullish trend. The specific strategy will require a view of implied volatilities for XLE over the appropriate time horizon.

XLU: Consider looking at the component stocks for XLU to see if you can identify a more bearish case as an opportunity or wait for XLU to get through the 50-dy SMA or 20-dy SMA to help provide a nearby area of support or resistance for your time horizon.

Figure 5: XLU with Linear Regression Channel (10/14/22-10/6/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)
Figure 5: XLU with Linear Regression Channel (10/14/22-10/6/23), ROC (14, 7), Volume, & SMAs (20, 50, & 200)

We get some inflation data before this article posts and both XLE and XLU could react to any surprises. Note current conditions in both names to see if a clearer opportunity emerges for either (or ideally, both). 

Regards,
Clare White, CMT


Always appreciated, Clare!

Tom Gentile
C1P: Chief 1-Percenter


Disclaimers

Stock and options trading has large potential rewards, but also large potential risk.

You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.

This is neither an offer to buy/sell/ or recommend a particular stock or option.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.

No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.

Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.

This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.

You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any investment decision made or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.

Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.

Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.

A full disclaimer can be found here:  http://www.tomgentile.com/legal_disclaimers.html.

Sign Up Now for Free Education!