Participation Continues to Broaden, Confusion in the Bond Market, the Noose Narrows for Gold (Premium)

Participation Broadens

The Market Regime remains bullish and participation broadened over the last six weeks. SPY and QQQ were already doing their part with clear uptrends and new highs throughout the year. The S&P MidCap 400 SPDR (MDY) broke out of a long triangle in late October and joined the new high parade. Small-caps joined in early November as the Russell 2000 ETF (IWM) broke above its March high and recorded a new high. This is the breakout heard round the world.

New highs are clearly bullish and the breakouts reflect broadening participation. The chart below shows the percentage of S&P 1500 stocks above their 200, 150 and 100 day SMAs. These indicators are part of the S&P 1500 Trend Model, which is part of the Composite Breadth Model. Breadth waned from April to September as these indicators fell below 50% in mid September. They turned up the last six weeks and all are back above 60%. The upturn in S&P 1500 Percent Above 100-day SMA is the most pronounced (lower window).

Introduction to Trend-Following

I will be presenting an Introduction to Trend-Following on StockChartsTV on Saturday, November 6th at Noon ET. I will cover seven trend indicators and test the Trend Composite on S&P 500 stocks. This presentation will also show the need for a market regime filter, the benefits of smoothing and the use of a momentum filter.

Market Regime Notes

The Composite Breadth Model (CBM) remains bullish and has been bullish since May 2020 (see Market Regime page for charts covering the CBM, yield spreads and Fed balance sheet).

There was a bullish breadth pop with the SPY breakout on October 14th and a bullish Zweig Breadth Thrust on October 25th.

Investment grade and junk grade corporate bond spreads remain at low levels overall (since July) and there are no signs of stress in the credit markets.

The Fed balance sheet expanded by $18.7 billion and hit a new high.  

TLT Forms Bull Flag Amid Confusion

The 20+ Yr Treasury Bond ETF (TLT) sports a long-term bearish sequence, but a potentially bullish sequence over the last eight months. The long-term bearish sequence is the 22% decline, counter-trend advance that retraced 50% and breakdown in late September. This sequence could be overruled as TLT moved back above the September breakdown zone. Note that TLT surged 14.6%, fell back into the reversal zone and bounced the last four weeks. The decline to the low 140s in mid October retraced 50-67 percent of the prior advance and this is normal for a pullback within a bigger uptrend. This area is also near broken resistance, which turns support (green line). I would also note that TLT is above the 200-day and StochClose just moved back above 60. Short-term, TLT surged and fell back with a bull flag. A break above Wednesday’s high would be bullish and argue for further strength.

Confusion reigns because the 10-yr Treasury Yield remains bullish. Note that TLT is based on 20+ Year Treasury Bonds and the 7-10 Yr Treasury Bond ETF (IEF) is more aligned with the 10-yr Treasury Yield. Longer duration bonds (20+ years) are more sensitive to shifts in interest rates and could be the leaders. Needless to say, this makes for a very complicated narrative. Oh, and note that the 20-yr T-Bond Yield is equal to the 30-yr T-Bond Yield (1.96%) and the 20-yr Yield briefly dipped below the 30-yr Yield on October 27th. Conspiracy theorist must be having a field day with the narrative here.

On the price chart, the 10-yr Treasury Yield remains with a bullish sequence and uptrend. Price reversed after retracing half of the prior advance, price remains above the rising 200-day and StochClose is bullish. The blue lines define a rising channel and the upswing since early August. A move below 1.4% would break channel support and call for a re-evaluation.

The Noose Tightens for Gold

The Gold SPDR (GLD) has been one choppy mess since June and mostly trending lower since August 2020. The range narrowed over the last few months and a large triangle is taking shape. There is clear support in the 160-165 area and resistance in the 170-172 area. Watch these levels for the next directional clue.

The next chart shows GLD with the StochClose levels on the price chart, StochClose in the indicator window and the Trend Composite. The gray zone marks the 125-day high-low range based on closing prices and the blue line is a 5-day SMA. I use an SMA because StochClose is smoothed with a 5-day SMA. StochClose would turn bullish (Cross above 60) if the 5-day SMA moves above the green line (171.79).

Dollar Corrects with Bull Flag

The Dollar Bullish ETF (UUP) remains in an uptrend and broke out of a falling flag. The green dashed line defines the upswing since late May with support marked at 25. A close below this level would reverse this upswing. Short-term, UUP broke out of a small wedge last Friday and this breakout is bullish.

Oil Becomes Short-term Oversold

West Texas Intermediate ($WTIC) fell around 7% the last three days and became oversold as the Momentum Composite dipped to -3. Oil was up some 34% from mid August to late October and ripe for a correction or pullback. Will this be a short pullback (1-2 weeks) or a longer corrective period (1-2 months). The chart shows a short pullback (March) and two longer corrections (Sept-Oct 2020 and July-Aug 2021). We never know, but there is a setup as DBE formed a small bull flag. Short-term traders can watch for a breakout at 18.40 or a StochRSI pop above .80

Thanks for tuning in and happy Friday!

-Arthur Hill, CMT
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