XLK Underperforms as QQQ Forms Bear Flag

Even though stocks edged higher last week, I was not so impressed with price action, especially at the end of the week (Friday). SPY opened strong and closed unchanged on Friday as selling pressure took hold in the afternoon. QQQ closed down a 1/2% and formed a bearish engulfing. Note that Apple and QQQ are showing relative weakness the last five weeks. QQQ has a rising flag working the last eight days and a break below flag support would target a decline to the 65 area (ouch!).



Third quarter earnings season kicks off on Tuesday with Alcoa reporting. The reporting calendar is fairly light the next two weeks and kicks into high gear from the 22nd onwards. Over the last two months, we have seen more negative guidance than positive guidance. FedEx, Intel, Caterpillar, Norfolk Southern and Nike are just a few of the companies to disappoint recently. The early trend is not positive for third quarter earnings. Is this negative news already baked into the cake? I don't think so because the S&P 500 is currently trading above its spring highs and near a 52-week high. The S&P 500, it seems, is priced for more quantitative easing, but not for a negative round of earnings.



On the 60-minute chart, SPY broke resistance in the 145.5 area and this area turns into a support zone. A strong breakout should hold and a move below this support zone would provide the first sign of weakness. I am, therefore, setting first support at 145. Note that a move below this level would also fill Wednesday's gap. I am setting key support at 143.50. A move below this level would break the two week trend line and last week's low. RSI support is set at 40.  





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The breakdown in the 20+ Year T-Bond ETF (TLT) is bullish for stocks, as is the upturn in the 10-year Treasury Yield ($TNX). TLT broke support at 123 and then fell sharply after the employment numbers on Friday. Despite this breakdown, the ETF is at a potential support zone. Notice that the decline retraced 50-61.80% of the prior advance and broken resistance (trend line) turns into potential support.



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The US Dollar Fund (UUP) broke down last week and this is also positive for stocks. This breakdown has to hold and the resistance lines are clear. UUP has resistance from the late September highs and RSI has resistance at 60. Breakouts in both would be bullish. Until then, the trend is down for the greenback and up for the Euro.



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Oil is all over the place, but the general trend is clearly down since mid September. USO broke support and broken support held. A falling wedge may be taking shape, but the trend is down as long as the wedge falls. I am leaving resistance at 34.75 and a break above this level is needed for a definitive trend change. RSI remains in bear mode with resistance at 60.



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There is not much change in gold, which remains negatively correlated to the Dollar and positively correlated to stocks. The Gold SPDR (GLD) edged above 172 in mid September and closed just above 172 on Friday. GLD has not moved much in the last three weeks. The trend is up and this is still viewed as a consolidation within an uptrend. First support is set at 171, but I will focus my attention on key support at 167. 



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Key Reports and Events:   
                                                           
Mon - Oct 08 - 09:00 – EU Finance Ministers Meet    
Tue - Oct 09 - 09:00 - EU Finance Ministers Meet    
Wed - Oct 10 - 07:00 - MBA Mortgage Index    
Wed - Oct 10 - 14:00 - Fed's Beige Book                
Thu - Oct 11 - 08:30 - Jobless Claims            
Thu - Oct 11 - 11:00 – Oil Inventories    
Fri - Oct 12 - 08:30 – Producer Price Index (PPI)        
Fri - Oct 12 - 09:55 - Michigan Sentiment
Thu – Oct 18 – 09:00 – EU Summit
Fri – Oct 19 – 09:00 – EU Summit

Charts of Interest: Tuesday and Thursday

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.