As mentioned above the rising wedge detailed two weeks ago in Digest Issue 39 "Flash Crash Ready & SPDR S&P 500 [Chart]" appears superseded by the successful retest of the August 24 flash crash low.
What we think we know:
The long-term uptrend from 2011 ended August 20 when SPX declined 43.88 to close at 2035.73. See the third arrow pointing to the left above. Checking the longer-term upward sloping trendline, USTL from the March 2009 bottom using semi-log scale, as technicians recommend for longer-term trends, shows it ended sooner on June 29 when SPX declined 43.85 to close at 2057.64, see the first arrow pointing the left. Applying the same log scale to the USTL from October 4, 2011 low shows the end was on July 7 as SPX advanced 12.58 to close at 2081.34, the second arrow pointing to the right.
The current upside momentum is likely to take SPX higher, perhaps enough higher to retest the 2100-2125 level. From a technical perspective, the September 17 high of 2020.86 is one remaining hurdle. Should SPX continue higher and close above 2020.86 it will activate the small double bottom pattern with an upside measuring objective up at 2172, but first it will need to close back above the USTL now about 2100 since once trendlines are broken, especially long-term trendlines, they become retracement resistance.
What we don’t know:
Was the August 24-25 decline just a correction or start of a longer-term bear market?
Will the rebound now underway become another sell the retracement opportunity and if so when? The apparent disconnect between fundamental stock values and a deteriorating economic outlook suggests the rebound is unlikely to continue beyond the previous May 20 high at 2134.71.
Foremost Five or Six
Upon realizing five was probably not enough, we expanded the category to six. Here they are in last week’s order of perceived importance.
United States Oil (USO)
iShares Transportation Average (IYT)
US Dollar Index (DX)
ProShares UltraShort 20+ Year Treasury (TBT)
DBX ETF Trust - Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR)
Expanding on the top three:
United States Oil (USO) 15.99 as a proxy for WTI Crude Oil, advanced 1.22 or +8.26% for the week as the November WTI futures advanced 8.98% closing at 49.63.
While most commentary remains biased towards an oversupplied market scenario those with the most at stake and arguably the most knowledgably, continue covering short positions while increasing their long futures positions.
Updating the CFTC Commitment of Traders report for October 6 shows the "Managed Money" group continued covering short positions by an additional 4,694 contracts but of equal importance, they added 14,629 longs thereby increasing their net long position by another 19,323 contracts representing 6.82 % of the open interest up from 3.80% on August 18. Based upon the continuing action of the “Managed Money,” it appears 14 for USO and 45 basis cash and near futures is now a good support level. In addition, they now both have well defined upward sloping trendlines from the lows that will also provide support on a pull back. For details on the importance of the "Managed Money," see Digest Issue 37 "Waiting for the Fed & S&P 500 Index [Chart]".
Market Breadth The McClellan Oscillator Summation Index reported by McClellan Financial Publications, gained an incredible 1,199.04 points last week going from -437.64 to + 761.40. Had breadth not improved as the S&P 500 Index advanced, the divergence would have been striking, but breadth improved along with the index, meaning more stocks participated especially those in the oil & gas and material sectors – all good news for the bulls.
iShares Transportation Average (IYT) 148.36 up 6.88 points or +4.86% for the week forming a potential double bottom much like the SPX that will be activated on a close above the September 17 high of 149.86 only 1.50 points higher. However, there is concern since rising crude oil prices are usually detrimental to the transports it implies some market participants do not think crude oil will go much higher or improving global economic conditions will benefit them both.
Improving China sentiment prompted short covering early last week by commodity bears that extended to equities starting a rotation into value stocks and sectors out of high multiple growth stocks that picked up momentum when minutes from the FOMC meeting were released apparently confirming the Federal Reserve is less likely to increase interest rates soon. By the end of the week, equities were said to be in “risk-on mode once again.
While the current upward momentum is likely to activate double bottoms in many stocks and ETFs with considerably higher upside measuring objectives, there is formidable trendline and previous high resistance to overcome. In meanwhile, as earnings reporting gets underway go with the flow using defined risk call spreads on stocks and ETFs with high options volume that partially hedges both time decay and implied volatility that will decline further as SPX advances. However, avoid new positions on stocks before their reporting date especially those with elevated implied volatility levels with the potential to make large moves in either direction. For a list see last week’s Digest Issue 40 "Volatility Kings™ 3Q 2105".
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