Last Friday I noticed that Utilities ETF (XLU) was beginning to break out from a declining trend channel and the PMO was about to give us a crossover BUY signal. Today we got the crossover (when the PMO is same reading as the signal line, we consider it a crossover) of the PMO. Volume is beginning to come in. While the chart is not perfect (BPI is pretty ugly), the participation numbers are improving and are not yet overbought.
June and July tend to be seasonally strong for XLU. Over the past ten years, XLU has gained 1.1% and 1.9% in June and July the majority of the time. Of course, we will want to revisit XLU in September. October is a very strong month seasonally. Rotating into Utilities right now could be a hedge against broad market weakness.
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MAJOR MARKET INDEXES
Each S&P 500 Index component stock is assigned to one, and only one, of 11 major sectors. This is a snapshot of the Intermediate-Term (Silver Cross) and Long-Term (Golden Cross) Trend Model signal status for those sectors.
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THE MARKET (S&P 500)
IT Trend Model: BUY as of 5/8/2020
LT Trend Model: BUY as of 6/8/2020
SPY Daily Chart: The PMO crossover BUY signal is still intact, but this crossover was more of a "drift" than a cross. Technically it is still a BUY signal. Notice that volume is contracting even as the SPY logs new all-time highs. Part of this is likely due to "breath-holding" in anticipation of the FOMC comments due out Wednesday.
The RSI is positive, rising and most importantly, not overbought.
Participation: The following chart uses different methodologies for objectively showing the depth and trend of participation for intermediate- and long-term time frames.
- The Silver Cross Index (SCI) shows the percentage of SPX stocks on IT Trend Model BUY signals (20-EMA > 50-EMA).
- The Golden Cross Index (GCI) shows the percentage of SPX stocks on LT Trend Model BUY signals (50-EMA > 200-EMA).
- The Bullish Percent Index (BPI) shows the percentage of SPX stocks on Point & Figure BUY signals.
You can't see it, but the GCI did tick a bit higher today, but it remains beneath its signal line. Negative divergences are stark on both the SCI and BPI.
Despite hitting new all-time highs, participation contracted with more stocks losing support at the 20/50-EMAs.
Climax Analysis: No climax today. I do note that New Highs are contracting even as price rises. The VIX remains above its EMA on the inverted scale, so there is some internal strength in the very short term.
Short-Term Market Indicators: The short-term market trend is UP and the condition is NEUTRAL.
The STO-B responded to new all-time highs by ticking up. The STO-V is continuing lower, but readings are now oversold. Momentum was not gained within the SPX as more stocks saw their PMOs turning over. The negative divergences in the short term are definitely taking the shine off new all-time highs. We need to be careful.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is NEUTRAL. The market bias is BULLISH.
The ITBM and ITVM continue to trend lower. The readings are not yet oversold. We did see a percentage point increase in the number of PMO BUY signals, but overall, we still have less than half of the index contributing to higher prices. The negative divergences continue.
CONCLUSION: The technicals are bearish. Price is moving higher, but nearly every indicator is moving lower. While negative divergences don't always play out with a major decline, most of the time they do. We know we don't have full participation in this rally and we know it isn't improving despite all-time highs. When the larger-cap leaders begin to deteriorate, hold on tightly. Most of these big FAANG names are still on PMO BUY signals, but when they start to drop and the index begins to drop, people will bail quickly.
How to proceed? Consider shifting exposure to Utilities, Real Estate or some Energy stocks/ETFs. Stops are also a good way to protect against a possible 'waterfall' decline. Ultimately, paring back exposure is the best protection. Currently I am 70% exposed to the market, but I will begin rotating or paring that back to at least 50% in the coming week(s). Indicators tell us to beware, let's not ignore that advice.
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At the close, Bitcoin finished up 7.5%. That gain is already being pared back. Price did break out of the symmetrical triangle, but the 200-EMA is already a problem. While the RSI is positive and the PMO is on a BUY signal, I don't have a lot of confidence in Bitcoin breaking much higher. The pennant is turning into more of a flag. If we see a breakout above $42,500, then I'll be ready to get bullish on Bitcoin. For now, I would look for it to stay in the current trading range.
Yields are rebounding after losing support. Technically, we would expect to see the decline continue after this snapback, but the Fed could change that landscape.
10-YEAR T-BOND YIELD
$TNX rebounded strongly after its breakdown last week. This could certainly be a reversal point, but the PMO and the negative 20/50-EMA crossovers tell me this is likely a snapback after the breakdown. I still expect yields to decline.
IT Trend Model: SELL as of 4/26/2021
LT Trend Model: SELL as of 7/10/2020
UUP Daily Chart: We have a rounded bottom in the short term on the Dollar. This is the first time since early April that we've seen two consecutive days of trading above the 20-EMA. The RSI is positive and the PMO is on a BUY signal. I would expect to see the Dollar break through the 50-EMA.
Note all of the previously unsuccessful attempts by UUP to stay above the 20-EMA. Now we see whether this rally is for real. A break above the 50-EMA will likely mean a strong rally ahead.
IT Trend Model: BUY as of 5/3/2021
LT Trend Model: BUY as of 5/24/2021
GLD Daily Chart: On the 6-month candlestick of GLD, there is a double-top and today's trading executing it to the downside. The minimum downside target would put price at around $170. This support level also aligns with the 200-EMA. I don't think the decline is over in Gold, but I do expect it to right the ship once it tests the 200-EMA.
(Full Disclosure: I own GLD)
The RSI is now below net neutral (50). $Gold did manage to also hold support at the 50-EMA and it closed on the rising trendline. Given the PMO SELL signal, like GLD, I would look for a test of the 200-EMA.
GOLD MINERS Golden and Silver Cross Indexes: Gold Miners bounced off the rising trend on Friday, but today it broke down. Like $Gold, GDX did stay above the 50-EMA and closed on its rising trendline. This would be an excellent reversal point, but participation is getting worse not better.
CRUDE OIL (USO)
IT Trend Model: BUY as of 11/23/2020
LT Trend Model: BUY as of 3/9/2021
USO Daily Chart: Since the end of May, USO has been in a steady rising trend channel. Nothing on the charts tell me this won't continue...although the RSI is beginning to hit overbought territory.
IT Trend Model: NEUTRAL as of 8/27/2020
LT Trend Model: SELL as of 1/8/2021
TLT Daily Chart: With yields rebounding after losing support, it has caused TLT to pullback to the breakout point. As I said earlier, I do except yields to continue lower. That would allow TLT to hold support.
The RSI hit overbought territory, but with the pullback, it has righted itself and sits in positive territory above net neutral (50). TLT just had an IT Trend Model "Silver Cross" BUY signal. The two day loss has caused the PMO to decelerate. I expect to see a bounce here.
Technical Analysis is a windsock, not a crystal ball.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
NOTE: The signal status reported herein is based upon mechanical trading model signals, specifically, the DecisionPoint Trend Model. They define the implied bias of the price index based upon moving average relationships, but they do not necessarily call for a specific action. They are information flags that should prompt chart review. Further, they do not call for continuous buying or selling during the life of the signal. For example, a BUY signal will probably (but not necessarily) return the best results if action is taken soon after the signal is generated. Additional opportunities for buying may be found as price zigzags higher, but the trader must look for optimum entry points. Conversely, exit points to preserve gains (or minimize losses) may be evident before the model mechanically closes the signal.
Helpful DecisionPoint Links:
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DecisionPoint Golden Cross/Silver Cross Index Chart List
DecisionPoint Sector Chart List
Price Momentum Oscillator (PMO)
Swenlin Trading Oscillators (STO-B and STO-V)
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