I continue to watch bonds and the Euro for clues on equities. The first chart shows the Euro Currency Trust (FXE) surging on the open, but failing to break last week's high and falling back. It is possible that we have a lower high taking shape after last week's support break. A tight range formed over the last few days. Watch these boundaries for the break. A move above 140 would be bullish for the Euro and stock market. A break below 138.40 would be bearish for the Euro and stock market.
The second chart shows the 10-year Treasury Yield ($TNX) in a short-term uptrend. $TNX broke short-term resistance on 13-Oct, formed a higher low at 24.5 (2.45%) last week and surged above wedge resistance. Also notice that the wedge breakout turned into support and held yesterday. Despite all the talk of QE2, long-term rates are moving higher and long-term bonds are moving lower. This is significant, but I am not sure how it will affect equities. Rising rates points to strength in the economy, which is positive for stocks. Money moving out of bonds is also money that is available for stocks. On the flip side, money could be moving out of bonds because bondholders are demanding a higher yield to hold US debt.
Even though the advance has grown laborious, SPY remains in an uptrend on the daily chart. The surge above 114 on September 20th marked the easy part of the advance. Since this surge, SPY has worked its way higher within a rising price channel. All kinds of indecisive candlesticks and bearish candlesticks formed, but these were never confirmed with a downside move. A break below channel support would argue for a pullback towards broken resistance around 112. CCI remains in its bull zone and has yet to break 50 to signal weakness in momentum.
The 60-minute chart details the channel. SPY gapped above resistance yesterday. Even though there was no follow through, the gap and resistance break held. A move below 118 would fill the gap and negate this breakout. I am raising key short-term support to 117. A move below this level would break the channel trendline and Thursday's reaction low. Combined with an RSI break below 40, this would be enough to reverse the short-term uptrend.
Key Economic Reports:
Oct 26 - 09:00 - Case-Shiller 20-city Index
Oct 26 - 10:00 - Consumer Confidence
Oct 27 - 07:00 - MBA Mortgage Applications
Oct 27 - 08:30 - Durable Orders
Oct 27 - 10:00 - New Home Sales
Oct 27 - 10:30 - Oil Inventories
Oct 28 - 08:30 - Jobless Claims
Oct 28 - 16:30 – Fed Balance Sheet
Oct 29 - 08:30 - GDP
Oct 29 - 09:45 - Chicago PMI
Oct 29 - 09:55 - Michigan Sentiment
Charts: Tuesday and Thursday in separate post.
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This commentary and charts-of-interest are designed to stimulate thinking. This analysis is not a recommendation to buy, sell, hold or sell short any security (stock ETF or otherwise). We all need to think for ourselves when it comes to trading our own accounts. First, it is the only way to really learn. Second, we are the only ones responsible for our decisions. Think of these charts as food for further analysis. Before making a trade, it is important to have a plan. Plan the trade and trade the plan. Among other things, this includes setting a trigger level, a target area and a stop-loss level. It is also important to plan for three possible price movements: advance, decline or sideways. Have a plan for all three scenarios BEFORE making the trade. Consider possible holding times. And finally, look at overall market conditions and sector/industry performance.
