AS WE MOVE INTO THE FOURTH QUARTER…

 

KEY LEVELS

S&P 500 (SPX/2557.64) – Support [levels where buying interest exists]: between 2540 and 2534 (both short-term), between 2500 and 2480 (non-trading). Resistance [levels where selling pressure exists]: New highs make it difficult to identify resistance levels because there are no “disappointed holders.”  2566 is considered “overbought” as measured by an upper Bollinger Band drawn around the 50-day moving average. 

Russell 2000 (RUT/1502.68) – Support: 1490, ~ 1485 (see chart below) and 1450. Resistance: between 1510 and 1515. 

 10-Year U.S. Treasury Yield Index [TNX/23.07 (2.30%)] – Support: 22.15 (2.21% - small level), critical between 21 and 20.34 (2.10% to 2.03%). Resistance: between 24 and 24.23 (2.40% to 2.42%).

  • Trend: contrary to mid-2015, just before domestic equity market indices moved laterally to down over a long period and during which there was a massive internal correction, most international and domestic equity market indices are currently rallying in tandem. This is supportive on an intermediate-term basis, and unless divergences develop between price and breadth, the odds favoring any weakness into year-end will be contained. Regardless, please respect the “tape” and tighten stop loss points to protect some gains.
  •  Breadth (advance/decline analysis and percentage of stocks above various moving averages):  despite currently being at short-term overbought levels, which is indicative of a near-term consolidation or pullback, both domestic and international A/D Line readings are supportive of equity prices.
  • Seasonality (secondary indicator better used in conjunction with “internal” indicators): domestic equity market indices ignored the historically weak period between early August and early October. This is indicative of a favorable demand-supply (buying interest versus selling pressure) attitude towards equities. 
  • Sentiment: sentiment indicators (newsletter writer’s opinion, investor surveys, and actions of investment managers) suggest that investor optimism is near or at levels considered excessive. However, from my experience sentiment indicators by themselves are usually poor timing indicators. They are better acted upon when they finally reverse direction following extreme readings and used in conjunction with price trend and “internal” indicators. Currently, while near or at excessive levels, these indicators have not reversed down.  
  • Strongest S&P Macro Sectors (relative strength analysis): Industrials, Materials, Financials and select portions only, of Technology.

For a longer-term trend perspective, below is a two-year chart of the S&P 500

S&P 500: 2 Year Log Chart with Rising 200-DMA. From a trending and non-trading perspective, this is an important chart as the fourth quarter progresses, and we enter 2018. 
S&P 500: 6-Month Chart. From a short-term perspective, the important support levels are: 2540, 2534 and 2508.

Regarding discerning a period of lateral-to-downward price action, besides the near-term overbought condition and using 2540 support on the S&P 500 accordingly, another near-term guidepost to follow is Small Caps.

Russell 2000 Index: 2-Month hourly chart. Since the August 21 low, in terms of relative price performance Small Caps have shown leadership characteristics versus Large Caps. 

ADDITIONAL OBSERVATION

On a year to date basis, Copper and Steel are exhibiting strong relative performance versus a number of equity, commodity, and fixed income proxies.

Copper and Steel are exhibiting strong relative performance versus a number of equity, commodity, and fixed income proxies. 

Gold is not showing leadership qualities, in terms of “outperformance.” It may take a move above resistance, shown by the “red” downtrend line and ellipticals before Gold starts outperforming other asset class proxies. In the meantime, Gold does appear to be forming a non-trading, longer-term bottom, as shown below.  

Gold is not showing leadership qualities, in terms of “out performance.” It may take a move above resistance, shown by the “red” downtrend line and elliptical before Gold starts outperforming other asset class proxies. In the meantime, Gold does appear to be forming a non-trading, longer-term bottom, as shown below.  

Have a wonderful rest of your week. Please know that Day Hagan Asset Management appreciates your support and hard work!

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written 10.16.2017. Chart sources: Stockcharts.com.

Print Copy of Tech Talk: Day Hagan Tech Talk 10.17.2017 (PDF)

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