S&P 500 CHALLENGES EARLY NOVEMBER HIGHS -- REGIONAL BANK SPDR BREAKS PENNANT RESISTANCE -- TREASURY YIELDS SURGE AS BONDS FALL -- DOLLAR WEAKENS AS FED EXTENDS QE -- GOLD AND OIL REMAIN SUBDUED
S&P 500 CHALLENGES EARLY NOVEMBER HIGHS... Link for todays video. The Fed left rates unchanged, but announced intentions to expand quantitative easing in January. In particular, the Fed will start buying $45 billion worth of Treasury securities per month. In its policy statement, the Fed also noted that low rates would remain as long as the unemployment rate is above 6.5%. This was a surprise because the market was not expecting the Fed to mention a specific target for the employment rate. With the unemployment rate currently at 7.7%, this means low rates could be here a while longer. Stocks, gold, the Euro and oil surged after the announcement. Stocks, however, fell back after this surge as trading turned mixed. Treasuries and the Dollar fell. More quantitative easing dilutes the Dollar and this put downward pressure on the greenback. Gold, as the currency alternative, moved higher along with the Euro. Oil, which has been underperforming gold and stocks of late, bounced off support in sympathy. Lets run through the key charts. Chart 1 shows the S&P 500 moving higher eight of the last ten days and thirteen of the last seventeen (assuming the index closes higher today). This bounce started as an oversold bounce off the mid November low and then proceeded to break the early November high. The November swoon is no more as the index took out this high. The rising 200-day moving average, late November low and early December low combine to mark support in the 1380-1400 area. The indicator window shows the Percent Price Oscillator (PPO) turning up in mid November and moving into positive territory. Momentum is bullish as long as this indicator is positive and/or rising.
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Chart 1
The Russell 2000 lagged today as it turned negative after the Fed announcement. Chart 2 shows the index breaking the September trend line at the end of November, consolidating for a six days and continuing above its early November high this week. The trend line break and consolidation lows mark the first support zone around 810. The indicator window shows the Russell 2000 relative to the S&P 500. This price relative turned up in mid November and broke the July trend line as small-caps started outperforming large-cap the last few weeks.
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Chart 2
BANK SPDR BREAKS PENNANT RESISTANCE... The Finance SPDR (XLF) and the Bank SPDR (KBE) reacted positively to the Fed statement as both showed some relative strength on Wednesday. Chart 3 shows XLF surging towards its September-October highs. The indicator window shows the price relative turning up and challenging its November highs. Chart 4 shows KBE breaking pennant resistance the last three days and continuing the late November advance.
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Chart 3
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Chart 4
TREASURY YIELDS SURGE AS BONDS FALL... Further quantitative easing triggered selling in treasury bonds as the 7-10 year T-Bond ETF (IEF) fell back to support from the mid November trough. Chart 5 shows IEF breaking triangle resistance with a surge above 108 and this resistance zone turning into support over the last four weeks. A move below the mid November trough would negate the breakout and put IEF in bear mode. Chart 6 shows the 10-year Treasury Yield ($TNX) bouncing off a support zone for the fourth time in four months. $TNX bounced off the 1.55-1.60% range in early September, early October, mid November and early December. This is one strong support zone. Overall, $TNX has been stuck in a range since late August. The bounce off support targets a move to the top of the range (1.85-1.9% area). Such a move would be positive for stocks, which are positively correlated with yields.
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Chart 5
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Chart 6
DOLLAR WEAKENS AS FED EXTENDS QE ... Chart 7 shows the US Dollar Fund (UUP) falling back below 21.9 over the last three days. After hitting resistance from broken support and the 200-day moving average in mid November, UUP turned down rather sharply in the second half of November. This is a positive development for stocks because stocks and the Dollar are negatively correlated. Last weeks high mark first resistance at 22.05 and key resistance is based on the mid November high. Chart 8 shows the Euro Currency Trust (FXE) in an uptrend since July and near resistance from the September-October highs. Resistance in the 130-131 area looks formidable, but the uptrend may just prevail here. Watch first support at 127.8 for signs that this uptrend is under threat.
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Chart 7
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Chart 8
GOLD AND OIL REMAIN SUBDUED ... Gold and oil have not performed well over the last three weeks. This is especially surprising because stocks are up sharply since November 20th and the Dollar is down. Gold and oil usually enjoy a negative correlation with the Dollar and a positive correlation with the stock market. Chart 9 shows the Gold SPDR (GLD) breaking wedge support with a sharp decline in late November. GLD bounced over the last five days, but has yet to produce a trend-reversing breakout. The October trend line and 29-Nov high combine to mark key resistance at 168. A breakout here is needed to reverse the downtrend that started in October. The indicator window shows the Percent Price Oscillator (PPO) in negative territory. The red dotted line marks the .35 level. Notice how a break above this level occurred in August, just before the big rally. There is nothing too special about this level. However, it does provide a buffer for bullish signals. A mere cross into positive territory is sometimes not enough. Requiring a break above the .35 level insures a minimal amount of positive momentum.
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Chart 9
