S&P 500 ($SPX) had an amazing come back from mid October low of 1820.66, as it blasted up to a record high close of 2018.05 – an almost 11% rise! This reaffirms long-term uptrend in the stock market that started back in October of 2011. Long-term momentum as measured by MACD also improved and is now bullish.
On the shorter-term chart of $SPX our entry was on October 21 and the position is still open with about a 6% gain. Profit taking is right around the corner. On the hourly charts of $SPXwe are very overbought. Backtesting of our trading system shows that profit taking is not yet warranted for several reasons.
1. Our system has not yet generated a sell signal
2. November and December have very bullish seasonality and markets are likely to rally into year-end.
Russell 2000 small-cap index ($RUT) also came back roaring, and its long-term momentum has flipped to bullish. A double-top from March and July is still in play though, so this rebound, strong as it may be, in my book is still a counter-trend bounce. Russell is also very overbought, so some profit taking is in the cards.
Long-term picture of bonds hasn’t changed this week – bonds are bullish. Shorter term, general bond funds, like AGG, are oversold and are ready for a bounce higher. Longer dated Treasuries (TLT) are dropping into the oversold realm, but I feel that they may still correct via a drop in price, or simply by moving sideways for some time.
Gold had a terrible week as it broke below support on Friday. It also lost 4.69% this week and reaffirmed its long-term downtrend dating back to 2011.
If gold’s week was terrible, gold miners (GDX)completely fall out of bed with an almost 16% drop. Our trading system gave us a short signal on September 5th of this year, good so far for a little over 30% profit. Gold miner’s attempted rebound from October 8th failed miserably. GDX tried to rally as much as 8% on that day, but in the bigger scheme of things it wasn’t enough. Notice that we did not even issue a counter-trend bounce alert regarding it.
Commodities are still firmly in a downtrend long term. A short-term rebound is unfolding as we speak, but may be in danger of failing already.
A rising dollar may be weighing on commodities and gold, however I noted a surprising strength in energy ETF – XLE. A rebound in commodities (DBC) most likely will translate in at least a short-term rebound in oil prices, and oil has already stopped falling.
It appears that equities related to a commodity are a more sensitive indicator of the future price of the underlying commodity. Just like it was the case with gold and gold miners, XLE seems to be gaining some traction and wants to go higher.
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Thanks for reading and have a great trading week!
Alexander Berger (MasterChartsTrading.com)