The Week Ahead: Stocks, Bonds And Gold

Just a few hours before the close on Thursday, the major stock market averages were in danger of their largest correction in several weeks. However, stocks rallied in late trading on hints of positive trade news that boosted stocks on Friday’s open. The major averages made new rally highs last week that were supported by new highs in the technical studies.

The small-cap stocks again led the way, as the Russell 2000 gained another 1.33% and is now up 17.9% for the year. I have been recommending the Vanguard Small-Cap Growth ETF (VBK), which is up 19.5% YTD. VBK is less diversified than the iShares Russell 2000 (IWM), just 633 issues instead of IWM’s 2010. However, in my view, VBK it has been acting stronger technically since it overcame the resistance in the $172-area two weeks ago. There is resistance derived from the monthly pivot analysis at $185.49, while the weekly starc+ band is now at $187.91. The September 2018 high was $189.63, which is also resistance.

VBK’s weekly relative performance against the S&P 500 surged above its Weighted Moving Average early in the year. This was a sign that VBK was going to do better than SPY, which is only up 11.7% YTD. The weekly On Balance Volume (OBV) turned positive at the start of the year, and has made new highs over the past two weeks (line b). The OBV is leading prices higher as it is above the highs from last September. The daily technical studies do not show any signs yet of topping out.

The Spyder Trust (SPY) made a new high on Friday at $279.36, which has brought prices near the widely-watched $280 level. It is widely anticipated that a strong close above this level will trigger another round of buying, which is certainly a possibility, but “widely-watched” scenarios such as these do not always pan out. There is quarterly pivot resistance at $284.16, which is the level I will be watching on a close above $280.

The S&P 500 Advance/Decline line made a new high again last week. As I discussed last week, the bullish new highs in all the of the key advance/decline lines had not been getting much attention since the S&P 500 A/D line broke out to the upside in late January (line b). For some reason, that changed last week: after the close on Tuesday, two analysts on a leading financial TV network were discussing the action of the A/D line.

As the current chart reveals, the daily S&P 500 A/D line is well above its strongly-rising WMA. Those of you who have read my analysis over the years probably know that the first hint of a correction comes when the daily A/D lines drop below their respective WMA’s.

Some of the weak economic data last week did get a fair amount of attention on Thursday and was blamed for some of the early selling. Much of the concern was focused on the Leading Economic Index (LEI) which decreased slightly in January. As it turns out, this month’s LEI did not include three of the ten components due to the government shutdown. Though the LEI has flattened out recently, there are no strong recession warnings yet from this key indicator.

It seems as though investors are more worried about rising interest rates than they are of a weakening economy. The yield on the 10-Year T-Note has been range-bound so far in 2019 within a flag formation (lines a and b). This is likely a continuation pattern, a pause in the trend of declining rates that has been in force since last October.

There were clear signals in the fall, based on the weekly MACD-Histogram, that yields were peaking. Since the start of the year, rates have been moving sideways, but the declining daily MACD-Histogram shows that the decline in rates may be ready to resume. Yields have been testing support (line b), and a close in yields below 2.590% could trigger the next decline in yields. The chart formation projects a decline in the yields to the 2.40% area.

The analysis of the yields is consistent with the weekly analysis of 10-Year T-Note futures. These futures have also been consolidating for the past month after peaking at 123 ⁸/₃₂ in January. This is the first target, which is about a full point above Friday’s close with the starc+ band at 123 ²⁶/₃₂. This market’s weekly OBV looks very strong, as it has continued to move higher, which is a sign of accumulation.

The weekly Herrick Payoff Index (HPI) which measures money flow through the open interest, volume, and price, is still positive. It is now testing its WMA, which may mean the T-Note futures will move higher this week and that yields will start to decline again.

Gold prices spiked on Friday to a high of $1349.80, but then closed at $1332.8. The long term chart of the gold futures shows that there is resistance going back to 2016 (lines a) in the $1365-$1377.50 area. Both Comex Gold Futures and the widely-traded Spyder Gold Trust (GLD) generated monthly doji buy signals in October.

The Comex Gold Futures’ weekly OBV moved above its WMA in October, and then overcame its downtrend (line b), which was a strong sign of accumulation. It is still acting very strong. The HPI moved above the zero line at the end of October, as it moved through the downtrend (line c). It is still rising and above its WMA, so it shows no signs of topping out, but the daily studies do show some loss of momentum.

There is no real change in my market outlook since last week, but I continue to take profits in stocks and ETF’s once my targets are reached. My daily monitoring of the A/D lines should alert us to signs of an imminent correction.

For those who completed the four-week dollar-cost averaging plan I just recommended before Christmas, I would sell 25% of the position on a move in the S&P 500 above 2805, and take slightly more than a 12% profit. The average entry price based on the S&P 500 was 2497.

I would hold the remaining long position as long as the S&P 500 does not have a week-ending close below the QPivot at 2597.

In my Viper ETF Report and the Viper Hot Stocks Report, I provide my A/D line analysis twice each week with specific buy and sell advice. New subscribers receive six trading lessons for just $34.95 each per month.