Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Pivotal Turning Points in 4 Key Markets
09/19/2013 10:25 am EST
The surprising FOMC announcement has spurred powerful gains in the global stock markets, confirming the positive outlook, but even more important, says MoneyShow’s Tom Aspray, are the key turns in four other key markets.
The FOMC decision to keep its policy unchanged shocked the markets yesterday, as the consensus expected the start of tapering. Those who were short going into the announcement were really hurt and some complained that they were actually misled by the Fed.
From a technical standpoint, there was no reason to be short in this market, even though it was getting overextended on a short-term basis. As I said yesterday, the “A/D lines have broken resistance and started new uptrends, while the OBV has confirmed new market highs for both the Spyder Trust (SPY) as well as the S&P futures.”
It is certainly not a time to chase the major averages, as, while they can still go even higher, the risk at current levels is high. The Spyder Trust (SPY), like the SPDR DJ Industrial Average (DIA), both closed at their starc+ bands.
There are many stocks that have now completed important base formation, which should set up good buying opportunities in the coming weeks. Also, my analysis indicates that these four key markets have now undergone important trend changes.
Chart Analysis: The chart of the 10-Year T-Note yields shows that they closed sharply lower Wednesday at 2.708%, down from a high of 2.984% on September 5.
- The support from the May-June lows, line a, was broken on Monday.
- Additional support, line b, was broken on Wednesday’s close with yields now at the starc- band.
- There is next support in the 2.600% area with the 38.2% Fibonacci retracement support now at 2.464%.
- This is a potential downside target with the 50% retracement support at 2.304%.
- The MACD peaked in June and had formed a long-term negative divergence, line c.
- The sharp drop Wednesday confirmed the bearish divergence.
- There is initial resistance in terms of yields now at 2.766% and then at 2.800%.
The emerging markets were up sharply on Wednesday with the Vanguard FTSE Emerging Markets (VWO) gaining over 4%.
- The % change chart shows that many country ETFs did bottom out on August 30.
- The iShares MSCI Brazil (EWZ) was down 30% in late August, but is now down just 12% for the year.
- The plunging Indian rupee made the sentiment on India very negative last month, as the PowerShares India (PIN) was down 27.5%. It is now down just 7.5%.
- Turkey was also hit by a sharp drop in its currency and the iShares MSCI Turkey Investable Market Index (TUR) has risen from down 30% to down just 12.7%.
- The daily studies on VWO, as well as many of the emerging country ETFs, are now positive and the weekly studies favor buying a pullback.
NEXT PAGE: Two More Key Markets to Watch|pagebreak|
Gold prices started surging right before the FOMC announcement with the SPDR Gold Trust (GLD) closing up over 4%. The weekly technical studies on the Market Vectors Gold Miners, as I noted last week in Gold Miners in Search of a Bottom needed a strong weekly close to complete a bottom.
- GDX had a low last week of $25.08, after hitting a high of $55.25 last September.
- The 20-week EMA is at $28.70 with the August high at $31.35.
- The 38.2% Fibonacci retracement resistance is at $35.00.
- The 50% resistance level is at $38.93.
- The relative performance appears to be forming a base and is close to moving back above its WMA.
- The OBV broke its year-long downtrend, line c, in August and surged sharply.
- The OBV looks ready to close higher this week, line d, and likely back above its WMA.
- The daily studies are positive with minor support now at $26.70-$27.20.
- The next resistance is at $23.99, line e, which is the 61.8% retracement resistance from the May high at $26.21.
- The daily relative performance broke its downtrend, line f, on September 6.
- The move in the RS line above the prior high completes the bottom formation.
- The daily OBV has also broken its downtrend, line g, which completed the bottom formation, line h. Volume was heavy Wednesday.
- The weekly OBV (not shown) is still well below its declining WMA.
- There is minor support now at $22.80-$23.10 with the monthly pivot at $21.18.
What it Means: The pullback in yields will finally give bond holders an opportunity to adjust the maturity of their bond portfolios. Though rates may move sideways to lower for several months, they are likely to again turn higher by next year.
The sentiment last month in the emerging markets was quite negative, suggesting that one should be looking to buy. There should be a good entry point in these markets over the next few weeks.
The action in the gold miners looks quite positive, and I will be looking at a few of the individual miners in the next few weeks.
The powerful rally in the homebuilders has left many on the sidelines. I have two recommendations in this industry, but the risk is a bit higher than I normally like. There should be some tightening of the price ranges in the next few weeks, which could present a lower-risk entry.
How to Profit: These recommendations were tweeted before the opening.
For iShares DJ Home Construction (ITB), go 50% long at $23.06 and 50% long at $22.43, with a stop at $20.93 (risk of approx. 7.9%).
For Lennar Corp. (LEN), go 50% long at $37.09 and 50% long at $35.93, with a stop at $33.73 (risk of approx. 7.6%).
Portfolio Update: For the Market Vectors Gold Miners (GDX), now 50% long at $26.74 and 50% long at $25.22, with a stop at $23.77.
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