Tom’s Weekly Newsletter December 7th, 2022

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

Thank you to Jerome Powell and the Federal Reserve

Throughout the day post the speech from Fed Chair Powell I was preparing to write the Dow is up 300-points.  Then it turned in to being up 400-points and then a short time thereafter it changed to up 500-points.

Then with a half hour before the close the Dow was closing in on being up 600-points.

The Dow closed up 737–points.  A significantly bullish day.

I ise the term significantly in terms of the Dow closing above a prior resistance high price level of 34,347 set last Friday.  It also is higher than the high set back on August 16.

This closing price becomes less significant if it can’t hold on to these gains, but for now it looks like it could power higher, with what I see is 35,000 on the Dow.

All of this bullish price action came on the heels of Powell’s speech today, which investor’s say he signaled smaller interest hikes are coming.

This has the Dow technically out of it’s bear market.

Investor’s now, it seems, are expecting the Fed could start reducing its hikes from 75-basis points to 50-basis points as early as this December.

Also note, the Dow wasn’t the only major index to perform well today as the NASDAQ closed up over 4% today,.  The S&P 500 saw a gain of 3%.

I guess to temper enthusiasm, there are still articles out there projecting a return to bear maraket lows as a possibility.

Corners of the Market

SPY – SPDR S&P 500 

Don’t look now, but this bullish day where the Dow closed up over 700-points has it out of bear market territory.

The chart above is on the SPY, the ETF that tracks the performance on the stock in the S&P 500.

It closed above its recent high of a bit over 400 today and looks to be closing in on the next pivot high of 410.

What may happen on a breakout like this is it may continue higher right out of the gate on its next day of trade (gap higher or not).

The other thing that may happen is it hovers around or dribbles back around this breakout price around 400, before the profit taking that likely causes that price action to wane and the buying then resume taking it higher.

Should this price level of 400 fail to hold, a pullback to a percentage of this up leg off the October lows may happen.

TLT – iShares 20+ Year Treasury Bond ETF

Last week we had a Fibonacci Retracement view included in our panel analysis of TLT.

TLT was at or near its 38.2% retracement of the past 150-trading days.

It dipped a bit and even with today’s bullish price action it did not take out that most recent pivot high.

This year has been a unique year in which TLT, and SPY haven’t traded as clearly in an inverse trading relationship.

But, if they resume that trading relationship and the equities markets continue to ramp higher off today’s major bullish day and the bullish run off the October lows, TLT may soften.

The price of 98 was a place where TLT broke out of its down trend and if TLT does sell off that would be a line in the sand, (kind of an old resistance becomes new support) for it.

UUP – Invesco DB US Dollar Index Bullish Fund

To say there is a sideways channel on UUP may be a bit early with that assessment. There is a pivot high at 29 and support, as identified last week, is 28.5.

That isn’t a very wide channel, but the increments on the chart of UUP are only $0.50 so just note the scaling.

Let’s talk inverse trading relationships one more time, but with equities and the US Dollar, (SPY and UUP).

These two securities have a tendency to trade inverse of each other like bonds and equities.

Monday the dollar was bullish and equities bearish and today things reversed.

The equities rallied big time off Powell’s speech and potential ‘tell’ of lower/smaller interest rate hikes to come, where UUP is trading near its recent lows.

USO – United States Oil Fund, LP

Interesting how things can change in as short a time as a week.

The last two trading days of last week were bearish and looked as if it would break the ascending support line.

Then we get a Darknet B, (Bullish) signal on USO.

There are times the Darknet B signal takes some extra time and effort to trade higher and can take out that signal lower to later then form and R or and A signal from Darknet.

Then we get price action of a Darknet B signal where the security trades higher.

The latter is what has happened with USO.

If one is to get bullish anticipating a move to the descending resistance line drawn in consider a technical stop a close back under the ascending support.

GLD – SPDR Gold Shares

Is it possible what we are forming or have already formed on the chart on the chart of GLD is a bullish flag pattern?

GLD has traded higher since its triple bottom as seen on the chart from the tail end of September through October.

It peaked at166 off that run and has since consolidated in a flag type fashion, which ended today with a bullish breakout of the flag formation.

Today, like with equities, GLD trade in a bullish manner and to signify the validity of how bullish today was, it traded at or near its high of the day.

Technical Analysis would say one takes the peak of the flag  to the support of the flag price differential and add that amount to the point / price of the breakout to establish a price target higher.

The flag differential looks like 4-points.  If one considers the breakout price of 163 we may see 167 on GLD.

From the Desk of a CMT – Money Holiday with Semiconductors

Last week I commented on the leading nature of semiconductors (which flowed to tech, then the broad market).

I wanted to check correlations for ETFs that represented the three major market indices (SPY, QQQ, and DIA), two technology (XLK and XLC), and semiconductors (XSD).

With semiconductor strength seeming to wane a bit right now, I wanted to see how the last long-term peak flowed across the different ETFs.

Using weekly charts to note the peaks, XLC actually led the late 2021 peak (Sep 3 ’21) pulling QQQ forward (Nov 19 ’21). XSD peaked (Dec 8 ‘21), XLK (Dec 27 ’21), and SPY & DIA followed (Jan 3 ’22). 

Looking at recent highs and lows on the weekly charts, QQQ and XLK remain weakest, followed by XLC and XSD, the SPY, then DIA looking the strongest (most bullish).

It’s worth keeping an eye on the sectors that led in peaks with an expectation that they will also lead in a turnaround.

QQQ’s most recent low was Nov 3 ’22; however, it was Oct 14 ’22 for XSD so I’m going to continue watching both of these for hints/alerts for the broader market.

I also wanted to check correlations across these ETFs, and all have strong positive correlations (0.90 or better).

Figure 1 provides correlation data for the QQQ, SPY, DIA, XLK, XSD, and XLC. It also includes XSD component stocks with reasonable option spreads and/or open interest.

So, movement is positively correlated across these ETFs, and we can still experience peaks and troughs that can lead by weeks or months.

Going back to a return to familiar market movement, we’ll use the Money Holidays tool for a Christmas case study. This tool provides information on seasonal patterns which fits nicely with a market returning to familiar behavior.

Figure 2 displays the daily chart for XSD with Fibonacci levels and the 65 & 130 simple moving averages (SMAs), as of Tuesday November 29th. The 38.1 2% retracement level is providing resistance and it appears we may be getting a cross of the fast MACD line down through the slow line, but it isn’t a done deal yet.

The next chart queued up is NVDA, a component stock well-correlated with XSD. The stock is moving around the 61.8% Fibonacci level, which could become support for the stock. This stock is not as strong technically as XSD, but we will be focused on timed entries and exits for the case study. NVDA was selected for its good option liquidity and was run through the Money Holiday scan. NVDA was in the top 5 of Close Percent Change when ranking the component stocks (Stocks > Stock Rankers > Close % Change to complete this scan, I used 30 days).

The Money Holidays tool is accessed by selection Tom’s Tools, the Money Holidays. Given where we are in the calendar, I used a 10-year lookback and bracketed the results by 15 days before the holiday to 20 days, post-holiday. I sorted the results by accuracy to get the top lines, post sort (Figure 4).

Scrolling down a bit, we come to an 8-day holding period alternative, as highlighted in grey in Figure 4.

Maximizing return while minimizing days in the case study makes the case for the second to last line, 9 days before and 1 day after the holiday.  Note the accuracy at 77.78% is not the highest, which is ok for this case study. If you like this tool, do identify a minimum accuracy you’ll except when scanning for opportunities.

Figure 5 provides annual data for the bracketed holding period and by selecting one of the annual bars, you obtain price data for that particular year.

Time = risk for a position, so I do like the idea of an 8-day holding period. As mentioned last week, there are strict rules for this case study, enter 7 days prior to Christmas and exit one trading after. For us, that will mean entry near the open on Thursday Dec 15, 2022, and exit near the close on Tuesday, December 27, 2022.

Unfortunately, the entry date is a couple of weeks away, so the remaining steps can be used to determine the type of strategy that can be deployed. Figure 6 displays the 60-90 day at-the-money (ATM) implied volatility (IV) for NVDA. I lean towards finding a low short-term IV which allows for a plain vanilla call option to reduce return impacts from slippage with multiple options. If NVDA doesn’t fit that profile in a couple of weeks, assess another (review stock chart, Money Holidays, then IV chart).

We will need to use a further out option to minimize the impact of time decay. Fortunately, the short holding period will help mitigate time decay as well. While there is a short-term low for NVDA ATM IV percent range, IV as a whole is elevated compared to earlier in 2021.

It will be right before Christmas before the next article posts, and I do hope the IV environment remains friendly for a long option. Stay tuned.

Regards, Clare White, CMT

Thanks, Clare!