Tom’s Weekly Newsletter September 7th, 2022

Tom Gentile

Posted in Newsletter

By: Tom Gentile on September 7th, 2022 • 9 mins read

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

The Downward Slide in the Financial Markets Continues

One of the traits of a downtrend is when you see a series of lower highs and lower lows.

This market since the recent top hasn’t seen a bounce higher to create a pivot high to any degree.

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This rollover from the recent highs is proving to the bears that the rally off the June lows was indeed a bear market rally.

Right now, it is hard pressed to considered bullish option trades for any length of time to expiry.

Tom Gentile
C1P: Chief 1-Percenter


Four Corners of the Market

SPY – SPDR S&P 500

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TLT – iShares 20+ Year Treasury Bond ETF

Image 57

To say TLT is in a bearish trend, like equities for the year.

It’s rally off the June lows, doesn’t really look like a rally since its trading pattern as seen above looks mor flat than the chart of the DIA or SPY.

Also note, TLT rolled over and closed below its 50-day Simple Moving Average (SMA) sooner than say the SPY did.

Last week we highlighted it is in a sideways trading range and is closer to the support of that range than resistance.

We have educated you all for some time that TLT (representing bonds) and SPY (representing equities( tend to trade inverse to each other, but that is not the case so much this year.

Where the equities market is rolling over TLT is as well instead of trading up while equities go lower,

UUP – Invesco DB US Dollar Index Bullish Fund

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The US Dollar is not having the bearish implication equities and bonds show in their respective charts.

UUP is above both its 50-day and 200-day SMA.

The last 8 trading days have seen UUP trade in a sideways, consolidation fashion.

This consolidation could be taken as a sign of UUP having positive relative strength in that it is at least holding up in price rather than breaking down.

I would be watching UUP, should it break out of this consolidation to the upside, to see if it has the capability to make another move higher similar in length to the one preceding this batch of consolidation prices.

An upward move in UUP may coincide with a further drop in equities (SPY).

USO – United States Oil Fund, LP

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Despite the highlight in previous newsletters a longer-term descending resistance line was broken to the upside, USO is not more so trading in a sideways, box trading range.

The support and resistance of the box range is highlighted by the yellow rectangle in the image above.

The reason it’s written in this looks bearish is that USO is trading closer to its support.

It also closed below it’s 50-day SMA two consecutive days now.

No predictions or market calls are made in this newsletter, but we do highlight what we see as areas of support and resistance.

From that educational perspective should USO trade lower we would deem a possible support point lower is the 200-dat SMA.

GLD – SPDR Gold Shares

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Any enthusiasm for the prosect of GLD higher based on it forming a higher pivot low last week was squashed over the last 4-trading days.

GLD convincingly took out the picot low.

It looks to be marching towards the support area we see at 158.

The question, as noted in the annotation made in the chart image above, is will it use that price as support and bounce?

Or does it take out that low?

If one brings up a 700-day chart they can see this 158-price area has been a support zone for that long.

If it takes that out lower, the next support looks to be the lows in March 2020.


From the Desk of a CMT –  Apologies & RS Case Study

I completely missed submitting an article last week and want to sincerely apologize to all newsletter readers, Tom, Jay, and the whole team for the mental checkout.

Relative Strength Sector Update and Case Study

As mentioned previously, a common relative strength (RS) investing approach views the rankings monthly, invests in the top two ranked sectors and holds those sectors until it drops to an RS of 4 or greater.

Allowing some movement down to a rank of 3 reduces the number of trades and potential whipsaws out, then back into a sector. 

We’re going to use RS conditions to identify relatively strong or weak sectors to narrow our case study search.

Note that relative strength ≠ bullish movement and relative weakness ≠ bearish movement.

We still need to assess a chart to confirm bullish or bearish sectors and stocks.

As a quick recap, the RS measured used is based on a calculation by Timothy Hayes, CMT, at Ned Davis Research (NDR) which blends three different rate of change (ROC) time periods across nine market sectors.

If you wish, the sector set can also be adjusted for volatility by dividing the ROC calculation by the ETF’s standard deviation. Table 1 excludes the volatility adjustment.

Table 1: Weekly RS (Unadjusted) – Energy & Utilities Displaying Relative Strength (8/29/2022)
Table 1: Weekly RS (Unadjusted) – Energy & Utilities Displaying Relative Strength (8/29/2022)

NDR ROC Approach to Relative Strength

The three ROC settings are 4-week, 13-week, and 26-week.

They are normalized by dividing each calculation by its setting speed (so 4 for the 4-week ROC) and then averaged together.

The resulting value is then ranked with 1 being the top (strongest) relative ROC sector and 9 being the last (weakest) relative ROC sector. 

Weekly pricing data is available from a variety of free sources (including Yahoo Finance) and sector components are available at www.sectorspdr.com/sectorspdr/sectors.

Table 2: Weekly RS (Vol Adjusted) – Energy & Utilities Displaying Relative Strength (8/29/2022)
Table 2: Weekly RS (Vol Adjusted) – Energy & Utilities Displaying Relative Strength (8/29/2022)

Note the persistence of rankings with this approach. 

When managing a longer-term portfolio, you want to consider something closer to this persistence rather than the shorter-term changes displayed in Table 1.

We will use the Table 1 results to search for our case study. And this time, no bearish strategies for strong sectors or vice versa. MDLZ had a bearish set-up but there’s so much to be said for putting the odds in your favor.

Since everyone’s style is different, Table 1 allows you to explore relatively strong sectors (Energy & Utilities) for bullish opportunities and weak ones (Materials & Healthcare) for bearish opportunities. You can use the sector ETF or its components, depending upon your preference. I like to load the ETF component list in the stock charts page, then scroll through them.

Figure 1: Scroll Feature on Stock Charts
Figure 1: Scroll Feature on Stock Charts

The utility sector did have some bullish charts, but this market environment and the time of year leans me towards weak sectors for bearish opportunities. VMC in the materials sector may fit the bill. When looking at option chains pretty wide Bid-Ask spreads were noted, so this is something a strategy would need to manage.

Figure 2a: VMC Daily Chart (625 days) with 50-day & 200-day SMAs, Fibonacci & MACD (8/30/2022)
Figure 2a: VMC Daily Chart (625 days) with 50-day & 200-day SMAs, Fibonacci & MACD (8/30/2022)
Figure 2b: VMC Daily Chart (625 days) with 50-day & 200-day SMAs, Fibonacci & MACD (8/30/2022)
Figure 2b: VMC Daily Chart (625 days) with 50-day & 200-day SMAs, Fibonacci & MACD (8/30/2022)

A move to the 38.2% retracement line or below is possible given the longer-term trend downward (declining 200-day SMA) and a bearish MACD. The 50-day SMA may add to the support at $159.37.

If support does not hold, the 50% retracement level at $143.57 is possible.

To assess strategies, we need to know the implied volatility (IV) environment. 

When reviewing different IV time periods it was noted there were more data gaps then usual – we’ll really have to watch open interest for these.

Figure 3: VMC IV Charts (8/30/2022)
Figure 3: VMC IV Charts (8/30/2022)

IV is relatively low so a Smart Search was completed, first for a Bear Put Spread (0 results) then for a Put (1 result).

Figure 4: How to Access the Smart Search (Searchers à Multi-Strategies à Smart Search)
Figure 4: How to Access the Smart Search (Searchers à Multi-Strategies à Smart Search)

The concern about liquidity had me select “High Quality Trades Only (if any)” right below the stock symbol.

An In the Money (ITM) put expiring in November was the only result; however, more than 100 contracts open interest (OI) was satisfied. 

The search results for a “Put” strategy appears below, followed by the strategy risk detail.

Figure 5: Searcher Results (8/30/2022)
Figure 5: Searcher Results (8/30/2022)
Figure 6: Risk Detail for Nov 170 Put – Note the Bid-Ask Spread (8/30/2022)
Figure 6: Risk Detail for Nov 170 Put – Note the Bid-Ask Spread (8/30/2022)

The spread is just too big this far out in time. To minimize these impacts, the sector ETF will be assessed instead (XLB). I do ask that you go through the exercise of checking out the chart with the same settings identified for VMC, as well as the IV charts. Although price is at the 50-day SMA, the 38.3% retracement is also a potential price target for XLB.

The XLB IV’s are a little more elevated than VMC making the case for a Bear Call Spread (credit) or a Bull Put Spread (debit). There was some funky price data for the bear Call Spread, so Bear Put Spread it is! Figure 5 provides the search results with November coming up once again.

Figure 7: XLB Smart Search Results (High Quality, Bear Put Spread – 8/30/2022)
Figure 7: XLB Smart Search Results (High Quality, Bear Put Spread – 8/30/2022)
Figure 8: Risk Detail for XLB Bear Put Spread (debit) strategy
Figure 8: Risk Detail for XLB Bear Put Spread (debit) strategy

Once again, the quotes seem a bit off so we can’t go forward.

Ideally, once the markets are open prices will update and XLB will provide an opportunity. Do use the Smart Searcher to reflect current market conditions and remember to manage to your risk. For our case studies that is $500. 

  • Upside Risk: Exit at $80.64 (recent closing peak) if max risk does not trigger signal
  • Target 1: 38.2% level, $70.65
  • Target 2: 50.0% level, $64.68

Things would have to accelerate to the negative for that 50% level to be reached so consider an 80% move to that level ($66.85 at Tuesday evening’s prices) and/or the substantial profit-taking at Target 1.

If the Bid-Ask spread do not narrow, this case study will be scratched. Once again my apologies for the article interruption.

Regards,
Clare White, CMT

Much Appreciated, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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