The markets are getting very interesting at this time Master Traders. I am not talking about the obvious large move in the NASDAQ 100 (we will get to it) that was driven higher by Amazon (AMZN), GOOGL, MSFT, INTC, and other Internet stocks and technology.
What I am talking about is the reasons for the markets to be going up. Yes, I know that they have been going up for a long time now. And we all know that it has been driven primarily by extremely low interest rates and a massive amount of liquidity being pumped into the system for years.
The Fed has started raising interest rates and it’s been well broadcast that it is going to continue which, eventually, will provide headwinds to the markets.
However, that has never caused an extended bear market initially. What does that is an inverted yield curve, which is not even close to happening at this time.
If you look at the chart of three-month interest rates (I will show you), the markets have already factored in the increased of short-term interest rates from the Fed. It’s obvious, based on the fact that the markets continue higher than they could care less about that. So what is so interesting at this time?
It’s possible that after a very long period of no “real growth” or inflation, that it is on the cusp of changing. Could I be wrong about this, sure, but the markets are going to tell me — and you — if that is the case.
If I am right, the media will tell you that the changes are hated by the market. Some are and it will be balanced by other inter-market influences. This will cause an increase in volatility. But overall, it will be bullish, as it always has been — until, and if, it goes too far.
Inter-Market Charts
Above from top to bottom is a chart of the US Dollar, the Commodity Index ETF, Crude Oil futures, 30-year interest rates, 3-month interest rates, and Gold futures.
The US Dollar has begun to trend higher, which has positive and negative influences. For example, profits of companies that do business overseas can be hurt by a strong dollar. US consumers have more buying power of products from foreign companies. There are other influences as well, but will leave that for another time.
What is more interesting is that the US Dollar spiked higher last Thursday, which typically would have a large negative influence on Oil, Gold and Commodities.
Gold did move lower to its support and stabilized on Friday, but it didn’t react as negatively as would be expected.
Crude oil actually spiked higher on Friday and pushed through resistance. And while the Commodity Index ETF did not breakout above resistance, it did move higher on Friday and closed near its high.
If it does breakout above this recent resistance, that would begin to confirm the possibility of some inflation influences. However, it’s much too early for that to be of any real concern. It’s actually bullish and needs to be seen at this point in time.
These inter-market relationships become a big pull and tug against each other until they come into agreement. This all has to do with supply and demand. Demand increases when there is growth or the belief for future growth.
As a Techno–Fundamental reader of these inter-market tea leaves, to confirm whether the move up in prices is just technical or based on demand from anticipated growth, interest rates should be moving higher.
They are and what happens when there is a demand for money $$. That demand occurs when there is growth or the anticipation of. Then businesses — and you and I — want to buy more “stuff” and borrow money to do it.
As we go into the end of the year and next year, rising short-term interest rates are already baked into the cake. See the 3-month interest rate chart. Rising commodity prices and long-term interest rates are positive because they signal real economic growth.
That is good for the markets, but it will create worries and the market, historically, goes up kicking and screaming; meaning, there will be more volatility with prices moving up and down in larger ranges.
If this all plays out as discussed, there eventually will be inflation concerns. Then the price of gold should increase slowly. To do that commodity and interest rates have to rise faster than the US Dollar or it will not happen. The Dollar could even be flat to slightly lower which would be fine. That is why we are recommending an initial bullish position on GLD below.
I hope you found this discussion interesting and informative. Let’s get to the markets and what they did last week.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. The Dow took a rest last week and let the NASDAQ do the heavy lifting to move the markets higher.
Sideways within an uptrend is bullish since it is a correction through time. Of course, that correction through time has to result in a move above that consolidation. A move below it would leave an area of resistance overhead.
When we discuss chart patterns and talk about uptrends, downtrends and sideways trends, I also explained that from the point of view of what others’ expectations are that are creating those patterns and trends.
Right now, prices are a bit extended from the moving averages below, which suggest a short-term correction. When prices go sideways at a time like this, it tells us that demand continues at these higher levels even though short-term extended.
In other words, buyers are willing to pay up at current levels rather than wait for a pull back. That strong demand and anticipation of higher prices, while bullish, also signals a view that there is little risk.
That may actually be the case since our market internals gauges are not signaling that there is a high risk of a large pull back at this time. However, if prices move under the recent consolidation, rather than move above, that leaves those buyers holding losses. That would increase the probability of prices pulling back further to where buyers would then feel comfortable entering again.
There isn’t any area of significant price support below current prices and that will only matter if prices move and close under Wednesday’s low. If they do that, then use the unfilled gaps marked and/or the rising 20-period moving average (blue line) as possible reference points where buyers will step up again.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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New Trade Ideas
Below is a daily chart of iShares Russell 2000 ETF (IWM).
Trade: Over $149.91, consider buying Nov (11/17) $144/153 bull call spread (18 DTE) for a limit of $5.88/share (the premium from the long and short call net each other out so paying no time decay).
Technical Setup: Bullish multi-week consolidation daily and weekly, monthly is +WRB Breakout to new highs.
Option Strategy: Bull Call Debit Spread (BCS).
Stop Loss: $148.28.
Below is a daily chart of Illinois Tool Works Inc. (ITW).
Trade: Over $159.12, consider: (a) shorting Nov (11/17) $155/150 bull put spread (18 DTE) for mid-point (closed at $.60/share); or (b) buying Nov (11/17) $150/165 bull call spread (18 DTE) for mid-point (but the premium from the short call will give positive time decay). The BCS has a higher Delta, so has higher reward-risk than BPS.
Technical Setup: Bullish continuation breakout daily after negative very bearish gap, bullish weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPS), Bull Call Debit Spread (BCS).
Stop Loss: $155.98.
Below is a daily chart of Comerica Incorporated (CMA).
Trade: Over $80.25, consider buying Jan (1/19) $70 calls (81 DTE) and selling Nov (11/17) $30 calls (18 DTE) at mid-point (closed at $9.97/share). Note: Earnings 1/16, but we plan on holding as a core long because of bullish monthly.
Technical Setup: Pro Bullish Gap Breakout daily with bullish breakout weekly and monthly.
Below is a monthly chart:
After a bullish breakout and run with the sector after the Trump victory, it consolidated for the past eight months in a bullish manner above the r20/50-MA. Also notice last month’s Bullish Range Expansion Bar with Bottoming Tail. The BT was a failed breakdown on the daily and weekly chart. Instead of moving lower, it reversed 100%, closing at the high for the month to new highs.
Option Strategy: Bull Call Diagonal (BCD).
Stop Loss: $78.18.
Below is a daily chart of Honeywell International Inc. (HON).
Trade: Over $146.50, consider: (a) shorting Nov (11/17) $145/138 bull put spread (18 DTE) for mid-point (closed at $1.14/share); or (b) buying Nov (11/17) $141/149 bull call spread (18 DTE) for mid-point (but the premium from the short call will give positive time decay). The BCS has a higher Delta, so has higher reward-risk than BPS.
Technical Setup: Bullish continuation breakout daily, bullish weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPS), Bull Call Debit Spread (BCS).
Stop Loss: $144.88.
Below is a daily chart of Ameriprise Financial, Inc. (AMP).
Trade: Over $163.04, consider shorting Nov (11/17) $155/150 bull put spread (18 DTE) for mid-point but a limit of $.60/share (closed at $.75/share).
Technical Setup: Bullish 1-2-3 Continuation daily, bullish weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPS).
Stop Loss: $154.88.
Below is a daily chart of SPDR Gold Shares (GLD).
Trade: Over $121.16, consider buying a half-lot of stock.
Technical Setup: Double Bottom retest on r200-MA daily.
Stop Loss: $118.98.
Below is a daily chart of Citizens Financial Group, Inc. (CFG).
Trade: Over $39.00, consider buying stock for a swing trade.
Technical Setup: Continuation Breakout daily and weekly, bullish monthly.
Stop Loss: $38.18.
Below is a daily chart of Applied Materials, Inc. (AMAT).
Trade: Over $56.82, consider buying stock for a swing trade.
Technical Setup: Breakout and strong uptrend all time frames.
Stop Loss: $56.18 (an hourly pivot).
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Managing Director of Master Trader
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
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