The risk-off trade remained in force on Wednesday with oil joining the sell-off in stocks, the Euro and gold. US Treasuries and the Dollar benefitted from a flight to safety. Concerns over Europe continue to dominate the headlines as Italian 10-year yields moved to 6.69%. Italy auctioned $3 billion of 5-year notes at 6.29% on Wednesday, which was the highest yield in 14 years. Italy has some 26 billion Euros worth of bonds maturing on February 1st. These will have to be rolled over, which means more supply hitting the global bond market early next year. This Euro crisis will likely extend well into the first half of 2012. But that is the long-term. Short-term, US stocks are oversold and the major index ETFs are nearing retracement levels. On the 60-minute chart, the S&P 500 ETF (SPY) remains within a downtrend and is now down around 4% in the last eight days. This decline has now retraced just over 50% of the prior advance. Also note that RSI reached oversold levels with a move below 30 on Wednesday. Retracement levels and oversold conditions could give way to an oversold bounce. Broken support in the 124 area turns into the first resistance zone to watch. The 50-60 zone turns into resistance for RSI.
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The 20+ year Bond ETF (TLT) extended its surge with a move above the upper trendline of the rising channel. RSI also moved to overbought levels for the first time since late November. Perhaps that oversold reading in early December was a fluke. In any case, the channel breakout and overbought reading are signs of strength. Broken resistance in the 119 area turns into the first support area to watch.
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The US Dollar Fund (UUP) surged to the upper trendline of the rising channel and RSI extended its overbought reading. UUP is clearly overextended, but there are simply no buyers for the Euro right now. Broken resistance in the 22.3-22.4 area turns into the first support zone to watch.
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Talk about a head fake. Oil surged on Tuesday, but the stock market did not confirm and the Dollar moved sharply higher. Oil got back in line with an even sharper plunge on Wednesday. The move broke two support levels: the mid December lows and the late November lows. Broken support around 37.75 turns into the first resistance level to watch on a throwback. RSI never broke 60 to confirm Tuesday's surge and plunged to oversold levels. Also note that oil is once again underperforming the stock market.
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Gold continued its free fall as the Dollar continued its surge. In fact, note that all commodities are weak and Treasuries are strong. This hints at deflation. While deflation could ultimately prove positive for gold, we have yet to see it on the price charts. The Gold SPDR (GLD) is currently in the falling knife stage, which is only suitable for bottom pickers with strong stomachs.
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Key Economic Reports:
Thu - Dec 15 - 08:30 - Jobless Claims
Thu - Dec 15 - 08:30 - PPI
Thu - Dec 15 - 08:30 - Empire State Manufacturing
Thu - Dec 15 - 09:15 - Industrial Production
Thu - Dec 15 - 10:00 - Philadelphia Fed Report
Fri - Dec 16 - 08:30 – Consumer Price Index (CPI)
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.
