Indicators settings confront chartists with a conundrum. The number of periods used for an indicator affects the speed and the number of signals. For example, 20-period RSI will cross the centerline (50) fewer times than 10-period RSI. 20-period Stochastics will become overbought/oversold less often than 10-period Stochastics. There is sometimes a tendency to adjust the indicator settings to align with past movements. This "curve-fitting" does not guarantee future signals will also align. There are times when different time periods are justified. At the end of the day, the settings depend on your time horizon, signal preferences and trading style. Traders looking for overbought/oversold readings in RSI would likely opt for shorter timeframes (2-10 periods). Traders focusing on crosses above/below the centerline may opt for longer timeframes to reduce whipsaws.
After reviewing the RSI and StochRSI signals, I decided to move back to the default settings recommended by its creator (Welles Wilder). I am not looking for overbought/oversold readings in RSI. Instead, I am more interested in crosses above/below 50 to confirm signals on the price chart. I also added a 10-day SMA to further confirm RSI crosses. A cross above 50 while below the 10-day SMA does not count. Similarly, a cross below 50 while above the 10-day SMA does not count. No system is perfect and bad signals are inevitable. I am just trying to do reduce whipsaws, study the indicator movements and identify swing reversals. StochRSI has also been adjusted to 14 to conform with RSI. Having said that, note that RSI and StochRSI for UUP are set at 20 periods. This is because UUP is clearly less volatile than the other ETFs. Settings are judgment calls that chartists need to make for themselves.
Turning back to the price charts, Wednesday marked another day and swing reversal. SPY notched a higher close with the 10-11 AM candlestick and this extended the Raff Regression Channel. SPY broke the extension with a move below 122 in the afternoon and RSI moved below 50. Also note that RSI was already below its 10-day SMA. There is still support at 119 from the prior troughs, but Tuesday's upswing has already reversed. What would it take to reverse this downswing? SPY would have to break 122.5, RSI would have to break above 50 and RSI would have to be above its 10-day SMA. Keep in mind that annotations require reassessment as new candlesticks appear. Also note that earning season and EU issues are likely to keep volatility high and make for treacherous trading.
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The 20+ year Bond ETF (TLT) hit support in the 114 area on October 12th and moved into a trading range. Support is set at 113.5 and resistance at 117. A break from this range will provide the next directional signal. Treasuries will likely take their cue from stocks and the Euro. Weakness in these two would trigger a breakout, while further strength would continue the short-term downtrend.
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The US Dollar Fund (UUP) continues to firm in the 50-61.80% retracement zone, but remains in a downtrend since early October. It is possible that a small inverse Head-and-Shoulders pattern is taking shape with resistance around 21.90. A move above this resistance level would also break the channel trendline.
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The US Oil Fund (USO) plunged below 33.50 and broke the Raff Regression Channel extension in the afternoon. RSI also moved below its 10-day SMA and below 50 to confirm this short-term trend reversal. The current Raff Regression Channel (red) is quite steep so I am setting resistance at 34.20 for now. A break above this level along with RSI confirmation would reverse this downswing. RSI needs to move above 50 and be above its 10-day SMA.
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The Gold SPDR (GLD) remains in a slight uptrend since late September. The pink lines show a rising channel, which is a rising flag on the daily chart. The blue lines show a Raff Regression Channel with the lower extension holding on Tuesday. Note that the Raff Regression Channel extends from the closing low to the closing high of the current move. I am marking key support at 158.
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Key Economic Reports:
Thu - Oct 20 - 08:30 - Initial Claims
Thu - Oct 20 - 10:00 - Existing Home Sales
Thu - Oct 20 - 10:00 - Philadelphia Fed
Thu - Oct 20 - 10:00 - Leading Indicators
Sun - Oct 23 – 23:59 – G20 Deadline for EU Leaders!
Charts of Interest: Tuesday and Thursday in separate post.
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.
