Tom’s Weekly Newsletter November 9th 2022

Tom Gentile

Posted in Newsletter

By: Tom Gentile on November 9th, 2022 • 11 mins read

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

Fed Day – 2022-11-02

Fed announces a 3/4 of a point or 75-basis pt. rate hike, and price volatility ensued.

Dow and NASDAQ Intraday (yahoo.com)
Dow and NASDAQ Intraday (yahoo.com)

The markets popped higher, and it looked like the run off the October low was ready to continue.  2:36pm hit and Bam!  The markets saw a huge down bar/candle taking out the gains from the pop on the announcement and then dropped the rest of the day closing at or near its lows.  A bearish day that may continue the rest of the week unless jobs data helps it regain its footing.

Tom Gentile
C1P: Chief 1-Percenter

Corners of the Market

SPY – SPDR S&P 500 

Image 5

It is always awesome to me to see this tried-and-true technical pattern play out in charts.

Old Resistance becomes New Support

Old Support becomes New Resistance

In this chart alone on SPY you get to see both technical patterns play out.

That price point in which the transition between resistance to support to now where it looks like it could be resistance yet again is 390.

I have an ascending support line (green dotted line on chart image above) and todays price action has clearly broken that and closed below it.

A lot can happen and happen quickly, but right now it looks like a retrace to the October low is possible.

TLT – iShares 20+ Year Treasury Bond ETF

Image 6

If you were expecting to see a chart on TLT where you see a clear picture of how bonds, which TLT is my representation for bonds, inversely correlates to equities you did not get that today.

How bad is it for bonds?

Bonds tend to trade inverse to equities and with a reversal day intra-day on Dow and S&P where the indexes closed down a large amount AND closed at or near their lows, one might have expected to see a bullish day for say a TLT.

Clearly that did not happened and really, the day of trade for TLT was a narrow range day showing not much in terms of price volatility.

The day was one of consolidation more so than anything else.

TLT is off its recent low and may have established a bottom for it, but we need to see higher price action or else this could all just be basing action.

UUP – Invesco DB US Dollar Index Bullish Fund

Image 7

Similar to the relationship between equities and bonds or gold, we see a similar type relation between US equities and the US Dollar.

As the US Dollar, (as represented by the chart on UUP), has been in a consistent and overall uptrend for most of this year, equities haven’t.

UUP peaked out late September of this year and has traded a bit lower from that peak since. It makes attempts and getting back to its year’s high, but the highs fail, and they are getting lower and lower.

Today post the Fed announcement where the Fed raised short-term rates by 75 basis points and Chairman Powell stating the amount of the rate hike is not as important as the pace of the rate hikes, (giving indication there could be more rate hikes in to the first of couple of month in 2023).

Equities sold off in to the close, yet UUP traded higher and is making an attempt at taking out its overhead descending resistance.  Will we be back to  UUP higher and the major indexes lower?  We will see.

USO – United States Oil Fund, LP

Image 8

You might have heard from a certain market analyst and financial news network personality that there is always a bull market somewhere.

I wouldn’t necessarily say USO, (my representation for oil and energy), is in a raging bull market, but it is higher on the year, and it is one sector / corner of the market that is holding up.

In the chart image above there are a couple of horizontal green lines indicating possible resistance areas and if you want to think of them as price targets that is for you and your brokers to assess.

There is an increasing support line on the chart that is an indication of price support.

So long as USO holds that support the prospects are there for a higher price move. A fail of that support could be an indication a move to precious lows is possible.

GLD – SPDR Gold Shares

Image 9

When one hears the word Strong as in something had a strong day it usually draws up the connotation of that being positive.

But when it is uses in conjunction with the term bearish there goes the sense of things being positive.

Today was NOT a positive day for GLD.  In fact, it was the opposite.

GLD had a bearish reversal day.  You can see by the upper shadow or wick on the days candle for GLD it traded higher than the open and then reversed, closing at or near its low of the day.

Further follow through to the downside has GLD at risk of breaking down through support, (indicated by the green, horizontal line on the chart).

If the Darknet B Bullish signal speaks to a price support it should hold that price.  We have seen though stocks can trade lower than the B signal on its way to a lower price where we look for a R Reiterated Bullish signal (or lower).


From the Desk of a CMT – Fed Day Wednesday, What “Is” for the Markets on Tuesday?

From last week …

For now, as long as Jerome Powell indicates fighting inflation is a top priority and we still have inflation reflected in our data, I have to believe rate increases will continue. … It’s the things that you analyze on a regular basis that will make the difference for you.

What can we look at to keep us grounded? I keep hammering away on this and one of the reasons to have this post today is I hate writing a pre-Fed meeting article that posts after the meeting because things can change a little more than usual. Do be prepared for speculation on the December meeting as soon as Jerome Powell finishes speaking Wednesday. 

Top-Down Consideration

A top-down approach is one that looks at the big picture first. For a pure technician it can mean looking at a monthly chart for a major average even if you tend to be single stock focused.

Although I display many daily charts in articles, monthly charts from TradingView for the three major US stock indices appears below. 

Each chart includes the 10-month simple moving average (SMA); volume; a 9-period rate of change (ROC); a 14-period Relative Strength index (RSI) with a 9-period SMA, the bullish range bottom highlighted in green, and the bearish range peak highlighted in red; and a tough to discern DMI. 

The good news to notice right away is that this chart probably won’t be hugely impacted by what happens on Fed day.

Since it’s a line chart, once November is over, it won’t even be captured if the news on November 2nd or even November 8th results in a high or low for the month. When you need to get your bearings, consider starting with a long chart line chart to minimize market noise.

Monthly Line Chart for the Dow Jones Industrial Average, 11/1/2022
Monthly Line Chart for the Dow Jones Industrial Average, 11/1/2022

There is nothing alarming with volume and the index line (blue) is right at the 10-month SMA. ROC is displaying a divergence since Dec 2020 and RSI was recently supported at the 20 level. Overall, it seems the bulls need to prove the September low was the low in this move. We’ll see how ROC behaves at the 0 level. I believe the RSI will be more telling though with the indicator right at its SMA.

Monthly Line Chart for the S&P 500 Index, 11/1/2022
Monthly Line Chart for the S&P 500 Index, 11/1/2022

The SPX is weaker than DJI with the index trading below its 10-month SMA, ROC further below the 0 line, and RSI below the 50 level and its 9-month SMA. 

The Nasdaq Composite (IXIC) is even weaker still …

  • Index below its 10-month SMA with lower highs and lows persisting
  • 10-month SMA is trending downward
  • ROC confirming the move downward
  • RSI hovering at the bullish support level of 40 and below its 9-month 

SMA

Monthly Line Chart for the Nasdaq Composite, 11/1/2022
Monthly Line Chart for the Nasdaq Composite, 11/1/2022

The long-term trend for the US markets is currently bearish. The longer the period, the stronger the trend is considered, so even as we track bullish intermediate-term or short-term opportunities, we should acknowledge what’s happening in that bigger picture view.

Before moving away from the concept of top-down, it also relates to economic conditions for those who are not pure technicians (rare). 

A personal preference for charts over econ data is the less frequent reporting and the reporting delay. Interest rates can serve as a bit of a proxy for fed activities, but that tends to be limited to the 2-year treasury. I think because it’s been so long since we’ve had a rising rate environment and less accommodative Fed, people forget that poor economic conditions generally don’t translate to a robust stock market. But I digress.

Let’s think of it a top-down approach another way. What performs well when rates are rising?

In the past, insurance companies (+ some other financial sectors) have done well because their investments are regulated, and they tend to be conservative. For now, these companies seem to be benefiting but there may be future headwinds if real estate portfolios struggle. 

Consider scrolling through the XLV component charts in Tom’s Tools charts. Rather than trying to anticipate a turn like so many headlines seem to suggest we should, minimally consider just going with a name that is already bullish. CAH, CI, HCA, and UNH are some health insurance stocks that are trending upward.

XLV Component Lit in Stock Lists
XLV Component Lit in Stock Lists

Weekly View

Changes in the long-term trend usually appear in the intermediate trend first, so let’s see how SPX appears in its weekly chart. Using the same indicators as the monthly chart and the use of two SMAs (10 and 40), Figure 5 displays the weekly chart for SPX.

SPX Weekly Chart in TradingView, 11/1/2022
SPX Weekly Chart in TradingView, 11/1/2022

Since the chart is less compressed, it’s easier to see lower highs and lows in SPX.

However, the index is above its 10-week SMA (approximates 50-day), with an ROC approaching the 0 level.

RSI may have hit resistance at the 50 level, but it is above its 9-week SMA. While clearly bearish (index trend and trend for SMAs), it’s worth monitoring SPX into the week’s end.

Last, let’s look at the weekly VIX. This index uses SPX option implied volatilities for a specific group of index options and is referred to as the “fear index”.  The VIX has stronger mean reversion characteristics than stocks, has a downward drift (generally moves downward), and stochastic jumps. That last one means it will periodically spike and you can’t anticipate it.

It looks like we’re seeing some mean reversion to the 40-week SMA, and we may overshoot this mean level.

The most recent peak is below the previous one and will want to see the VIX generally below the SMA with peaks that overshoot the mean line to the upside (as seen in the 2003 – 2006 period) as changing conditions (bearish to bullish) that could impact the stronger, longer-term trend.

Weekly VIX with 40-Week SMA and 14-Week RSI, 11/1/2022
Weekly VIX with 40-Week SMA and 14-Week RSI, 11/1/2022

If you prefer to stay in a single platform, compress the daily chart in Tom’s Tools and simply use a longer-term SMA. We’ve been using 65-days and 130-days in our Relative Strength (RS) reviews, so you may want to consider those or go with a more traditional route, the 50-day and 200-day SMA. Broaden your view and reduce the noise by expanding your time horizon by one or two periods (i.e., monthly, and weekly if daily charts are your norm).

Thankfully, the next article posts before Thanksgiving and we’ll have a little more runway before the December Fed meeting. It will be too late for me to introduce a case study with the Money Holidays tool but do consider checking it out a week or two before to identify some potential opportunities.

Regards, Clare White, CMT


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.