Tom’s Weekly Newsletter June 15, 2022

Tom Gentile

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By: Tom Gentile
June 15th, 2022

8 mins read

Originally published on June 8th, 2022. Subscribe for early access!

Fed Day – June 15, 2022

What was forecast most recently was delivered.

Recent assessment that the Federal Reserve was going to raise interest rates higher by 0.75 basis points and that’s exactly what they did.

One can dig into deeper analysis from many different economists, money managers and you know the financial news networks are dissecting all this every which way ‘til, well, tomorrow.

One thing I know is the market doesn’t like surprises. Though this was the largest rate hike in the last 28 years it was forecast earlier in the week and the fact we got it and it is deemed necessary and a step in the right direction we saw prices rally today.

The markets were deemed oversold, and you couple that with this expected action from the Fed and the markets rallied the rest of the day.

Some would say the tact was investors/traders were selling the rumor and buying the news. Usually, we hear it happen the other way, but recognize and you may have heard this, the markets were pricing in (or had already priced in) a 0.75 basis points.

Now, they traded higher, but fell off a bit from the intra-day high; could have been some folks taking some profits.

The key from here is follow through. The economy is still at risk of a recession and folks really want to see a soft landing on inflation. Layoffs are picking up, prices are still high, earnings are still to be affected – by how much is to be seen so there is still much more work to be done but based on today’s move we could see a brief rally of a single digit percentage amount.

Tom Gentile
C1P: Chief 1-Percenter

Four Corners of the Market

SPY - SPDR S&P 500 
SPY – SPDR S&P 500 

This may or may not happen.

Should we see a gap up on the SPY tomorrow AND it holds, meaning it does not trade lower, fill that gap, and make a new low.

AND it has another day or two of follow through to the upside, the circled in part of the chart above could be a bullish island reversal.

There is no way we are saying this is the bottom for the markets and prices trade forever higher from here.

A rally in the ballpark of maybe 5% may come our way.

Then it is up to economic data and what people read in to those numbers and what it says about inflation at the time of the reports and somewhat what the Fed is anticipated to do with rates because of those numbers that will dictate future market direction.

TLT - iShares 20+ Year Treasury Bond ETF
TLT – iShares 20+ Year Treasury Bond ETF

We found a great passage in an article from The Balance. It reads: 

Bonds compete against each other on the interest income they provide. When interest rates go up, new bonds come with a higher rate and provide more income. When rates go down, new bonds have a lower rate and aren’t as tempting as older bonds. 

The bad news for bondholders is that fixed-rate bond issuers can’t increase their rates to the same level as the new issue bonds when rates go up. The older bond rates are locked in, based on the original terms.

As a result, the only way to increase competitiveness and attract new investors is to reduce the bond’s price. As a result, the original bondholder has an asset that has decreased in price. It also doesn’t pay out as much as the new similar bonds on the market.

The Balance: Why Do Bond Prices Go Down When Interest Rates Rise?
UUP - Invesco DB US Dollar Index Bullish Fund
UUP – Invesco DB US Dollar Index Bullish Fund

Let’s reemphasize what UUP is…

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 a drop in equities prices is expected.

The UUP had a strong rally off the latest Darknet B or Bullish signal.

Inverse correlation:

UUP made new highs recently, but if you look at the equities markets rallying up off their lows today on the Fed announcement you can see the inverse correlation in that UUP traded lower today.

Of the equities market sees bullish follow through, UUP may fill the gaps.

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

You know a pattern we love is Old Support becomes New Resistance and the opposite which looks like is happening on the above chart for USO, Old Resistance becomes New Support.

The price of 85 looks like it has a chance of becoming new support, the previous peak in early March at 85 is a prior resistance level and it broke above that in late April.

USO made a bit higher run that has since tailed off a bit and now sees USO closing in on that price of 85.

The key for this pattern to work is for it to test that price and bounce higher from there.

The nice thing about this pattern is it is easy to assess a price stop from a technical perspective in that should one initiate a bullish trade off the expectation of price bouncing off 85, a close in price below that could be used as the technical stop.

GLD - SPDR Gold Shares
GLD – SPDR Gold Shares

Let’s not focus on the Darknet signals on the chart of GLD above.

Let’s not look at a longer-term view, but rather focus on the April to present box range or sideways channel.

It has a double bottom at the price support of 168 and one can consider the price area of 174 as its resistance.

One can consider a bullish option strategy at any time they wish, but if one is doing so on the anticipation of GLD trading between support and resistance and they feel it is more at support and they want to trade it TO resistance of 174 they certainly can.

Another more conservative options approach would be to wait for a price break out of the channel and anticipate a move equal to the distance between support and resistance of this channel higher, which is 6-points.

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

Note this article was submitted by Clare last week. Operations being what they were, we did not get a Weekly Newsletter out last week. This education is too goo not to provide it to you so here it is in this week’s newsletter.

Is the Market Bounce Proving Itself?

An interesting VIX – RSI (Relative Strength Index) divergence provided an alert for a potential market turn but the duration of the subsequent turn is uncertain.

The VIX has mean reversion characteristics and as expected, it overshot its 50-day Simple Moving Average (SMA) which was used as an objective mean level. 

The SPY also reversed; however, unconvincing momentum and poor market breadth led as to the conclusion that a true reversal needed to prove itself. This may be just a bounce.

Figure 1 provides a daily chart for SPY with the 50-day and 200-day SMA, Fibonacci levels, and RSI.

The second part of the chart includes Volume and MACD.

Figure 1: SPY Daily Chart on 6/7/2022
Figure 1: SPY Daily Chart on 6/7/2022

Although we are using two momentum indicators, we can gain beneficial information because RSI is a bounded indicator (0 – 100) while MACD is unbounded. They behave slightly differently.

Figure 2: Volume and MACD View for SPY (6/7/2022)
Figure 2: Volume and MACD View for SPY (6/7/2022)

A few things to note:

  • SPY bounced off it’s 38.2% retracement level while RSI was completing a slight bullish divergence (approximately 5/23/22). RSI did surpass the 50 level and is moving sideways with SPY
  • Volume is decreasing, so it is not confirming the move upward
  • The bullish move up in MACD is subsiding a bit; however, an initial cross on either side of the zero line can be sustained (not always as this chart shows)

Since the 50-day SMA may serve as resistance overhead for SPY, watch RSI, Volume, and MACD as indications of SPY’s ability to push through this level.

Last week we looked at a proxy for market breadth, which was negative, this week we’ll look at seasonality. Recall the expression, “Sell in May and go way”? 

Figure 3 displays The Money Calendar for June 2022, which adds to the bullish case for this upward move (navigate to this by selecting Tom’s Tools, The Money Calendar).

Figure 3: June 2022 Money Calendar Making an Overall Bullish Case
Figure 3: June 2022 Money Calendar Making an Overall Bullish Case
Figure 4 provides the detail for Thursday June 9th (top group).
Figure 4 provides the detail for Thursday June 9th (top group).

Despite some bullish seasonality displayed by The Money Calendar, I don’t think we are out of the woods yet for this downturn… here are some more potential headwinds:

  • If this is a wave four counter move the recent lows should be surpassed once wave five is underway (Elliott Waves – watch the March 29th high for this to be clearly negated)
  • The Fed is currently tightening by allowing longer-term bonds to mature without replacing them, this is bearish for the stock market
  • There’s a Fed meeting next week, and expectations are another 50 basis-point increase in the Fed funds rate will occur – this could put additional pressure on the economy

The VIX may mean revert again by heading upward which aligns nicely with next week’s Fed meeting.

Consider searches that will allow you to uncover low to increasing volatility conditions if this suits your style from a time standpoint.

Clare White, CMT

Thanks, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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