Don’t stay too long in a trending market

The FTX cryptocurrency slump hampered the stock market rally by heading towards Thursday’s CPI report after stocks rallied on Monday and Tuesday. The more than 2% drop in the Nasdaq Composite and the S&P 500 on Wednesday spurred an increase in bearish activity. It was also a tough day for market-leading Dow Jones Industrial stocks as 29 out of 30 stocks were down. Walt Disney
DIS
(DIS) had a decline of 13.2% while Occidental Petroleum
BONES
(OXY) fell 9.2% as they both missed out on earnings.

Bitcoin’s double-digit decline
BTC
last week will likely create waves for several months, if not more. The decline was consistent with the dominant negative trend that has been in place all year and Friday’s Bitcoin analysis still points to the downside after a rebound.

Last Thursday’s gains were record-breaking as new buying and short hedging continued to push stocks higher to end the week on a high note. The Dow Jones Industrials gained 8.8% for the week and is now down just 7.1% year to date (year to date). Relative performance analysis identified it as the market leader in October.

The wave of positive investment was strong enough to stimulate all markets, as the Dow Jones utility Average and the SPDR Gold Trust both rose more than 4%. The market interior was very strong on the NYSE as 2660 issues were advancing for the week and only 760 down.

Both the bond and equity markets followed the pattern outlined well last week as the stock market bulls passed the test, but it was interest rate markets that provided the best clues ahead of Thursday’s surge.

The correlation between rates and the equity market has been unusually high since last June as falling yields set the stage for the summer rally. The new upward trend in yields put pressure on equities as they peaked in August and added fuel to the market decline. Having followed the Treasury futures market since its inception, I should point out that historically the correlation is not always so clear.

Prior to the announcement of the FOMC on November 2ndnd my analysis of both the 10-year and 2-year T-Notes indicated that yields were close to topping. The fact that the 10-year yield tested the 20-day EMA has increased the chances of a further increase in yields. The 10-year yield increased from 3.92% to 4.218% before falling on November 8thth.

The multiple negative divergences in the MACD and MACD-His and their weak action gave me confidence in a failure of the rally. Thursday’s drop in yields and the close below the 3.840% support confirm a high. The yield closed below the daily stellar band on Thursday as the bond market closed on Friday. This increases the chances of a rebound in yields this week before they move even lower.

Although the 10-year T-Note yield did not reach a new high as I thought it was possible, the 2-year T-Note did as the high at 4.780% was right in my chart and the pivot resistance target zone. The yield has not yet closed below my 4.258% support level, but it looks likely soon

The sharp decline in yields was likely fueled in part by a brief squeeze on Treasury futures. CFTC’s recent Commitments of Traders (COT) report revealed a very high short position in 2-year T-Note futures. The short position of the big speculators has almost doubled since August.

2-year T-Note futures have been on a downward trend since August. This is supported by the fact that the monthly pivot levels (in blue) have moved to the downside over the past four months, which is a sign of a trending market. The counter-trend rises were identified by the falls below the star bands and the monthly pivot support test (in green). Friday 4th Novemberth (point b) futures have reached both levels that set the stage for this week’s rally

This week we will receive data on how many shorts have been forced to hedge, but in my opinion the short squeeze has probably just begun as a return of futures to the highs of early October would not be surprising. If that happens, perhaps some of these big speculators will start paying more attention to charts. It seems that big speculators and hedge funds may have stayed with this trend for too long

In October, the BofA survey of large money managers revealed their largest liquidity position since 2001 as they have bleak prospects for corporate earnings over the next twelve months. We will have another poll next week, but I guess many will think this is just another bear market rally they expect to fail.

Last week’s action was strong enough to make most of my weekly and daily lead / decrement indicators positive. This means the market is likely to move even higher towards the end of the year. The same analysis did a good job of warning us in August that the rally was over.

The fact that the daily S&P 500 Advance / Decline line exited its WMA on Friday 4th Novemberth in my view it was “a very bullish configuration when the WMA is rising”. The A / D line reached higher highs early last week needed to support a move through the resistance at $ 390.75 b line.

The sharp pullback of the A / D line on Wednesday failed to provide the completely clear forecast before the CPI report and I raised a few stops as a result. The spy
PY

TO SPY
it closed above its starc + range for the past two days and the monthly R1 is at $ 401.12.

The downtrend in the $ 412 area, line a, is the short-term target, but I think we will see a pullback before it is reached. I would like to see even stronger A / D numbers on the next rally to keep the WMA rising sharply.

Most ETFs and many stocks have been extended to the upside since last week. One I liked about Stericycle last week
SRCL
(SRCL) rose more than 10% last week. The expected pullback this week should provide more reasonable entry points, but I would continue to do so only in focus on ETFs and stocks that are driving the S&P 500. As always, beware of risk.

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