BONDS RALLY AS FED LEAVES RATES UNCHANGED -- S&P 500 CLOSES STRONG -- INTERNET HOLDRS BREAKOUT -- OIL SURGES ON LOWER INVENTORY DATA -- GOLD MOVES HIGHER WITH OIL -- GOLD STOCKS OUTPERFORMING BULLION -- ENERGY STOCKS OUTPERFORMING OIL
THE FED DOES AS EXPECTED...
Editor's Note: John is travelling this week and will be back next Monday. Today's Market Message was written by Arthur Hill of TDTrader.com.
For the third straight time, the Federal Reserve kept the Fed Funds target unchanged at 5.25% on Wednesday. Policy makers noted that inflationary pressures within the economy were countered by evidence of economic slowing, especially within the housing market. Bonds took heart from the statement and rallied off support. TLT found support around 87 from the early September consolidation and Wednesday's surge reinforces support at 87. The move also filled Monday's gap and bonds liked what they heard from the Fed.
Chart 1
S&P 500 REMAINS OVERBOUGHT AND STRONG... The S&P 500 reacted to the Fed announcement with a close above 1380. The index is now up around 13% from its July low and shows no signs of weakness. Yes, the index is overbought as RSI trades well above 70. In fact, RSI is trading at its highest level since November 2004 and the indicator has been above 70 for eleven of the last sixteen days. RSI first moved above 70 on 4 October and the index has tacked on another 30 points since then. Overbought is reason to be cautious, but the ability to hold above 70 is testament to strength and I see no reason to be bearish. The index is holding its July trendline and continues to forge ahead with higher highs and higher lows.
Chart 2
INTERNET HOLDRS BREAKS RESISTANCE... Led by strength in Amazon (AMZN), Ebay (EBAY) and Yahoo! (YHOO), the Internet HOLDRS (HHH) jumped over 3% and broke a key resistance level. The ETF established resistance around 50 from broken support and the Sept-Oct highs. HHH was turned back at this level at least three times since early September and Wednesday's breakout is bullish. The next resistance level is around 56 from the May high.
Chart 3
OIL SURGES OVER 3%... Buoyed by lower than expected oil inventories, the U.S. Oil Fund ETF (USO) surged above 54 and filled Monday's gap. The big advance is positive, but a little more work is required to turn bullish. Namely, I would like to see USO break above 56 and close above the early October gap. A breakout here would argue for a retracement of the prior decline and such a rebound could extend to around 65. Resistance in this area stems from broken support and the falling 200-day moving average.
Chart 4
GOLD FOLLOWS OIL HIGHER... Gold and oil have been moving in tandem the last few months and gold followed oil higher on Wednesday. A simple visual inspection of this chart shows that both rallied in March-April, declined in May-June, rallied from mid June to mid July and then declined into early October. Should the pattern continue, a breakout in oil would likely lead to a breakout in gold.
Chart 5
GOLD REMAINS IN A DOWNTREND... Despite the big surge on Wednesday, the StreetTracks Gold ETF (GLD) remains in a downtrend and more work is required for a reversal. GLD gapped below support at 60 in early September and this support level turned into resistance. GLD failed to break back above 60 in late September and again last week. The advance over the last two days is certainly positive, but a break above resistance at 60 is needed to show some real strength.
Chart 6
GOLD STOCKS ARE LEADING GOLD... The Gold Miners ETF (GDX) is not waiting around for gold to break resistance. GDX broke above resistance on Wednesday and gold stocks are outperforming bullion. In fact, GDX formed an island reversal the first two weeks of October. GDX held the mid October gap up and broke above its late September high with three white candlesticks. This is bullish for gold stocks and I will be watching to see if gold can follow through. One or the other has to give.
Chart 7
