Tom’s Weekly Newsletter June 1, 2022

Tom Gentile

Posted in

By: Tom Gentile
June 1st, 2022

9 mins read

Originally published on May 25th, 2022. Subscribe for early access!

The Bear Market Conditions May NOT be Over Just Yet

Well would you listen to this in 2022, Janet Yellen prior Fed Reserve Chairperson admitted “I think I was wrong then about the path that inflation would take”.

The day she and current Fed Chair Powell met with President Biden we hear from her… 

“There have been unanticipated and large shocks that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I … at the time, didn’t fully understand.”

Was this the cause for the sell off today? We won’t say that, but the timing is such that we read this information and the market ends up lower on the day.

The equities market had a bullish run last week, and people were speculating if, asking if and some were even stating the bear market is over.

What I have said is to temper your enthusiasm for a full-scale bull market recovery as things have NOT changed.

The Fed is still likely to execute more rate hikes in upcoming meetings and the Russia / Ukraine war still persists, supply chain issues are still with us and the fight against inflation continues (hens the reason the Fed is still apt to hike rates.

Look at my charts in the SPY page and you will see the technical pattern I emphasize that I believe will emphasize a bit more bullish strength that I would need to see before I get more bullish conviction.

A series of lower highs and lower lows is a downtrend and to have a higher low could foreshadow a reverse of that downtrend.

Tom Gentile
C1P: Chief 1-Percenter

Four Corners of the Market

SPY - SPDR S&P 500
SPY – SPDR S&P 500

One pattern that would be encouraging from a bullish perspective is if the SPY retraces back and forms a pivot low, but that pivot low is higher than the pivot low experienced around 390.

Darknet Bullish Stocks
Darknet Bullish Stocks
TLT - iShares 20+ Year Treasury Bond ETF
TLT – iShares 20+ Year Treasury Bond ETF

The possibility of old support becoming new resistance as pointed out last week looks as if it has come to fruition as TLT is rolling over yet again.

The pivot low formed at 113/114 could be a new support if a channel forms. And that channel forms with multiple price hits of those two price zones.

As long as there are pending rate hikes to come there doesn’t appear to be any reprieves for TLT.

TLT is optionable, and you can decide for yourself (and with your brokers) if there is cause to trade options from support to resistance and vice versa.

It would take one to be an active observer of the security in order to be on top of when to enter and exit their directional options trades if that is what they choose to pursue.

UUP - Invesco DB US Dollar Index Bullish Fund
UUP – Invesco DB US Dollar Index Bullish Fund

The emphasis over the past couple of weeks, or rather the focus has been how far the UUP will retrace before it finds a support.

Not that I want to trade it or options on it, (as I see it the scaling in the grid shows the price moves aren’t robust as I / would like to go after an options trade), but… I still looked at my Fib tool to see if 28.2% would be support.

Today it bounced higher even though it did not trade down to that Fib retrace number.

UUP is a gauge of the strength of the US Dollar against a basket of foreign currencies. There often is an inverse correlation of trading between UUP and US Equities (and I use the SPY for my analysis of US Equities), so if UUP trades higher I expect SPY lower – and that happened today.

USO - United States Oil Fund, LP
USO – United States Oil Fund, LP

When USO finally break out of the triangle pattern, volume should surge and that would help with conviction for the move, whichever direction it breaks.

Image 49
GLD - SPDR Gold Shares
GLD – SPDR Gold Shares

In the SPY chart above I drew in arrows that if the price action followed the pattern of those arrows it would form a higher pivot low and that could speak to a reversal of trend (for how long is to be determined if it reverses at all).

The chart on GLD looks to me as if it is a bit further into that type of formation.

We have the Darknet signals on the chart and the S doesn’t necessarily mean sell, but it does mean the run-up in price up to that point could at least form a stall in the price action.

That stall could be done in a bit of a pullback fashion.

That pullback could stop at the 172 price (which is a doji day today) and if GLD trades higher in the days to come, we would see that higher pivot low.

This would be a bullish sign and could be a foreshadowing of higher price in GLD to come.

From the Desk of a CMT – Market Bounce or Reversal?

Since the case study presented last article was closed at a loss in excess of the max loss identified in our risk management, let’s review it before moving on to broad market conditions.

Case Study Update

On May 10th, the VIX was signaling the potential for a reversal, so we used the RSI Scanner to identify a bullish stock and came up with Clorox (CLX, part of the consumer staples sector). An opportunity to “fill a gap’ to the upside was also on our radar. A short-term case study was presented, but not short enough apparently. While the market had a bit of a bounce heading into the holiday weekend, CLX lost almost 7% on May 18th pushing the strategy through its max risk that day. The stock gapped down 2.4% at the open and continued down through the day with brief pauses resulting in loss of $800 rather than the targeted $500 max risk.

Figure 1 displays the CLX stock chart with risk graph. Note the max profit level was projected at a one standard deviation move up, right to the price where the gap would be closed. The case study presented in the May 11th newsletter is as follows:  Buy 2 CLX May 27 155 Calls + Sell 2 CLX May 20 165 Calls for a Net Debit of $900

Figure 1: CLX Call Diagonal Calendar (Short May 20 165 call – Long May 27 155 call, 5/10/2022)
Figure 1: CLX Call Diagonal Calendar (Short May 20 165 call – Long May 27 155 call, 5/10/2022)

Case Study Exit

  • The 2 spreads for a max loss of $500 if the spread goes to $400
  • The short calls by May 20th (buy back or roll to next week)
  • The long calls by May 27th 
  • The 2 spreads for an expecting max gain $550 if the gap is closed

By May 18th that max loss of $500 was exceeded. Figure 2 displays case study data on the day it was closed for a loss of $800.

Figure 2: CLX Price Chart with Call Diagonal Calendar Risk Graph (5/18/2022)
Figure 2: CLX Price Chart with Call Diagonal Calendar Risk Graph (5/18/2022)

VIX – RSI Divergence

Last week’s divergence between the VIX and the Relative Strength Index (RSI) indicator did precede a decline in VIX and an eventual move up in SPY, the S&P 500 Index ETF.

Figure 3 provides an updated view of this chart (TradingView) with a Simple Moving Average (SMA) ribbon with 20-day, 50-day, 100-day, and 200-day SMAs.

Note the VIX did mean revert to the 50-day SMA and, a level that will approximate the 50-day exponential moving average (EMA). 

This begs the question … do we have a sustained reversal underway or is this a bounce?

In recent instances of daily VIX – RSI divergences, the VIX overshot the 50-day SMA rather than finding sustained support at this level.

This is common for mean reverting behavior and given the current picture, suggests continued VIX weakness and a continued move upward for SPY. However, it does not indicate the decline we’ve experienced since the January 2022 top is done. We’ll need to look at other tools to gauge conditions.

Figure 3: Daily VIX with SMA Ribbon (20-, 50-, 100-, & 200-dy) and RSI (TradingView on 5/31/2022)
Figure 3: Daily VIX with SMA Ribbon (20-, 50-, 100-, & 200-dy) and RSI (TradingView on 5/31/2022)

Using the 50-day and 200-day SMA as objective trend identifiers, along with RSI bullish and bearish ranges, what does the SPY daily chart tell us?

Since it’s so easy to add the Fibonacci lines, I use 600 trading days to capture the March 2020 low.

Figure 4 provides the chart and of immediate note is that SPY just bounced off it’s 38.2% retracement level while RSI diverged.

We’ll still focus on bullish-bearish ranges, but perhaps we get a bounce to resistance at the SMA’s shown note past support/resistance for these lines),

We can objectively say:

  • The intermediate term trend is down as displayed by a downward trending 50-day SMA
  • The long-term trend is turning down as seen by a recent turning over of the 200-day SMA
  • RSI is moving in a bearish range (20 – 60)

As a more traditional use of RSI, note the indicator divergence as price was approaching the 38.2% level – it was a nice alert for the bounce similar to the VIX action.

Continue to monitor RSI as price approaches areas of potential support and resistance.

Figure 4: SPY Daily Chart with 50-dy, 300-dy SMAs, RSI, and Fibonacci Levels (5/31/2022)
Figure 4: SPY Daily Chart with 50-dy, 300-dy SMAs, RSI, and Fibonacci Levels (5/31/2022)

Let’s also use Tom’s Tools for a check on breadth. Using the Moving Average Stock Ranker Tool (Stocks > Stock Rankers > Moving Averages), note the number of stocks under a bullish crossover condition versus bearish crossover condition by selecting Most Days Since Latest Bullish Moving Average Crossover versus Most Days Since Latest Bearish Moving Average Crossover, respectively. The SMAs used for this scan were the 20-day and 50-day.

If you have a chance, run the scan for 50-day and 200-day SMAs and consider the implications of your results.

The scan on 5/31/2022 yields 83 with bullish crosses between the last 0 and 145 trading days and a whopping 411 with bearish crosses between the last 0 and 103 trading days. That’s some bearish breadth and suggests this recent bounce needs to prove it itself. Watch RSI and volume as SPY approaches the 50-day and 200-day SMA to gauge the ETF’s ability to keep the upward move alive.

Figures 5 and 6 provide the Bullish and Bearish scan results on 5/31/2022.

Partial List, Bullish Cross (Total Stocks, 83)

Figure 5: Most Days Since Latest Bullish Moving Average Crossover (S&P 500 Optionable)
Figure 5: Most Days Since Latest Bullish Moving Average Crossover (S&P 500 Optionable)

Those stocks with the most days since the crossover are likely in a sustained upward move – you do need to view the chart to confirm this (“pic” option is the quickest for this).

Partial List, Bearish Cross (Total Stocks, 411)

Figure 6: Most Days Since Latest Bearish Moving Average Crossover (S&P 500 Optionable)
Figure 6: Most Days Since Latest Bearish Moving Average Crossover (S&P 500 Optionable)

I think the bounce needs to prove itself and it’s not a surprise the 38.2% retracement was the first opportunity for some support. Stay tuned.

Clare White, CMT

Thanks, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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