The daily stochastics on the major averages are rolling over but have not even given sell indications, and the market sold off hard. Much more of this will suggest that the “ease of movement” is down, rather than up. The action in the bond market was violent and a surprise.
If SPY can make it through 281 it looks as if new highs could be struck by yearend. The Transports are finally trading a bit better than SPY and DIA. One more rate rise should do it, and after this we would expect relative stability in rates.
One other point that we keep mentioning is that our %Bears indicator continues to hover around 19. What has happened with the data is that Bulls have fallen off, but they have moved into the “Correction”, and not the Bears camp. We would buy oil above 55.
Right now, the most important thing for stock prices is breadth. The Transportation Indexes are in good shape here, suggesting the economy is in good shape going into the end of the year. The market should advance here as the Thanksgiving period is usually up for most of the week, even if this Friday’s session is negative.
How the market acts from here is key – per our indicators at the beginning of the week, stocks should rally from here. We would like to see a rally into the end of the week, followed by pullback into the end of November (after Thanksgiving – that week is almost always up), then a strong December.
If new lows drop again this week it would be a positive indication. We believe that Oil is very close to a bottom. This is the time of year when the agricultural commodities traditionally make a seasonal low.
Should the market pull back from here and close flat, as we mentioned, it would be a great set up for further advance. Gold is overbought, and may see some pullback, but there is enough support in the 114 area that we would add to positions if this is tested.
We continue to expect a yearend rally that could be substantial – back to 290 or higher. One significant thing that happened last week was that TLT broke decisively below 114. Our forecasted move to 105 looks to be resuming, and TLT to 105 is no longer as crazy as it seemed in the 130-area!
It still looks as if U.S. equities will make a tradable bottom this week, and indeed this may be happening now, as the daily stochastic has moved above “20” on SPY and other index ETFs. TLT has failed to rally and below 114 suggests a resumption of the move toward 105 we have been looking for.
Above 274 would suggest that this correction is ending and that a significant low has been made. We doubt we will see 260 but this is possible this week.
We would like to see a choppy market into the end of October, as this would reload monthly indicators prior to a yearend rally, as we have been forecasting. Bonds are in an interesting position at this time. The reason we say this is the trading action on Thursday and Friday in TLT has generated a strong short-term buy pattern that should take TLT up to 117 or so from here.
There has been a 50% retracement of the decline from 290 on SPY or so, and options expiration shenanigans suggest a test of 275 is possible – we would add money there as well as here on a down open. Trading objectives for GLD are 120, then 122, but this could be making a longer-term bottom.
These indicators suggest that a retest of 270 on SPY or so is likely but adding some money in this area should look very good a few months from now. We would buy some GLD on a flat to down open but not a big gap up. GLD targets are now 120, and above that 124 or so.
The New Lows continued to expand relative to New Highs – this continues the negative trend we have seen over the last four weeks. Many breadth indicators such as the McClellan Oscillator have become short-term oversold and are trading near previous lows, but intermediate indicators are NOT oversold enough and suggest more downside is possible.
We now have four weeks of more new lows than new highs, and new lows expanded last week. This indicator continues to suggest caution. News from our contacts in Europe suggests there could be some problems in Greece and Italy so this is an area of concern.
