The bulls have been in charge for a number of months this year, which has the Dow up 6.5% on the year. The NASDAQ is up 31.7%, and the S&P 500 is up 16.9% year to date.
While the securities markets have stalled some since their recent July highs, last week’s economic reports may have signaled things could soon turn higher once again.
On Thursday, we got a look at the latest initial jobless claims numbers and the Consumer Price Index (CPI) for July, and on Friday, the Producer Price Index (PPI) report came out.
Now, as I’ve said before, I don’t really care about CPI and PPI. I know a lot of investors think they’re very important and everyone leans forward in their seats when they’re announced, but…
…to my mind, there are much better market indicators out there.
Regardless, the Fed has made it clear that they’re basing their rate hike decisions on these economic reports, so these inflation gauges seem to matter even more to people than they usually do.
Last month, there was little discussion as to whether the Fed would raise interest rates; that quarter-point rate hike was pretty close to 100% expected.
Following the latest numbers — an increase in initial jobless claims and lower-than-expected annual increase in inflation — a growing number of analysts believe the case for a September Fed pause is building.
Some analysts say that could be bullish for stocks. Some say it could be bearish. I say there are better ways to evaluate the market… which is why I look at the “Four Corners.”
Here’s What’s Going On in the “Four Corners” of the Market
My favorite tool to track (and even predict) the markets is what I like to call the “Four Corners” — stocks, bonds, currencies, and commodities. This gives you a nice overview of what’s coming, and how to prepare for it.
And here’s what they’re saying…
S&P 500:
Below you’ll find the year-to-date chart for SPDR S&P 500 ETF Trust (SPY).
On it, you can see an ascending support line (green dotted line). Based on that line I’ve drawn in, we can see SPY is still just treading water above the longer-term support… but it hasn’t actually broken below the line.
The horizontal green line just under $445 is the likely next support level for SPY.
If that happens, it will mark yet another instance of old technical resistance becoming new support — a very frequent occurrence in technical analysis.
If SPY reaches this level and then bounces higher, it will indicate the new bull market in equities is still intact. Based on what I’m seeing in the other four corners of the market, I believe that is very likely.
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Bonds:
Next up is bonds, represented here by the iShares 20+ Year Treasury Bond ETF (TLT). In this year-to-date chart of TLT below, we can see yearly support around $99. The overhead or high on the year is $109.
Following that April high, TLT has put in a series of lower highs — a bearish trend. From here, it is very possible that TLT will continue to move lower by the distance of the high point of the descending triangle to the support. That large of a move is not guaranteed by any means, but it is what the pattern is projecting.
Any type of bounce from current levels will likely flame out when it tries to break above that horizontal resistance.
As we’ve discussed, there tends to be an inverse trading correlation between equities and bonds, which means they trade/trend in opposite directions. Because of that, a continued drop in TLT would further confirm a bullish outlook on equities.
Currencies:
If you haven’t heard me or any of my team say so, we do not trade options on the Dollar Index Fund (UUP) as the price movement is not robust enough to make the prospects of getting doubles on option trades possible.
Instead, we use it to help in our determination of direction for U.S. equities due to the inverse relationship between the U.S. dollar and SPY; when the dollar is strong, it puts pressure on equity prices (and vice versa).
Right now on the chart below, you can see UUP is in the upper part of a yearlong sideways trading range, which may be one reason for the small slide we’re seeing in SPY.
However, should UUP roll over after hitting that horizontal resistance line, we may see that money flow out of the dollar and into equities, which would be bullish for SPY. No guarantee, but it is what we will look out for.
Commodities:
Last week, I discussed how the technicals on the SPDR Gold Shares (GLD) chart still gave a bullish outlook even though gold prices had dipped. Since then, gold has slid a bit lower, but those three levels I pointed out are still the ones to watch. Here’s an update:
1) The closing low to closing high over the year shows the 61.8% fib level was the most meaningful support level for GLD. UPDATE: This support area is still the support GLD needs to stay above to remain more bullish than bearish; GLD currently remains just above this level.
2) The green-dotted line around $184 indicates a double-top resistance; a break above this level would be a very bullish signal for GLD. UPDATE: No breakout yet, but this remains the level to watch.
3) The dip GLD is going through may find a bit of support around $180 now that it has filled a prior gap up on the chart. UPDATE: GLD broke below this gap support, but it is still holding above the more meaningful 61.8% Fib retracement level.
If GLD can hold this important support line and then break above the double-top resistance around $184 — which is what my analysis is showing — then we’ll be off to the races.
You see, when commodities break out, they don’t run for just a year or two… In the 1970s, they ran for an entire decade. Starting in 2002, we got another decade.
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To your continued success,
Tom Gentile
America’s #1 Pattern Trader
