Technically Speaking For October 31

Includes: IWM, QQQ, SPY
by: Hale Stewart


The TPP will go into effect this year.

The dollar remains strong.

While markets had a solid day, the 30-minute charts are still technically weak.

I’ve seen two words to describe the current global political trend: re-nationalization and de-globalization. The former accurately describes the trend from the perspective of a nation looking out while the latter captures the current slow deconstruction of global trade arrangements such as GATT and regional trade treaties. Against this backdrop, it is almost ironic to note that the Trans-Pacific Partnership goes into effect on December 30 now that Australia has signed off on it. A central purpose of the TPP was to organize smaller Asian countries into a coherent political bloc to counterbalance China’s growing dominance, which would provide the U.S. a natural constituency to pressure China to change its trade practices. Had we signed-on, we would now be able to diplomatically achieve what we’re trying to do through a trade war but without tariffs' disruptive effects.

The dollar is back in the spotlight this earnings season as companies warn that the strong dollar is hurting international earnings. The following five-year chart places this development into a longer-term perspective:

The dollar began to rise in the second half of 2014. It rose from 80 to 100 by the second quarter of 2015 for an absolute gain of 25%. The dollar declined modestly from the first quarter of 2017 to the first quarter of 2018, although it remained at a high level relative to other currencies. Once again it is increasing in value. With the Federal Reserve raising rates and a strong domestic economy, it’s doubtful the dollar will decline in value in the near future.

Finally, since we're in the middle of earnings season, let's take a look at corporate profits from the latest GDP report.

This chart shows the absolute level of profits, which moved sideways from 2012 to mid-2017 for a number of reasons: the energy sector collapse, the generally weaker international growth environment, and modest though not spectacular domestic growth. Profits have been on a solid uptrend for the last few quarters ...

... which is captured nicely in the Y/Y percentage change chart. Corporate profits are a long-leading indicator: rising profits allow companies to hire more employees and increase capital spending. However, I've also started to see some commentary to the effect that we're now at peak earnings, with the U.S. economy on a tax cut and government spending sugar high. No one is talking about a recession. There is, however, increasing talk of a slowdown.

So -- let's turn to today's performance chart:

This is a nice, solid day. The QQQ was up 2.25%, which is very nice considering the negative FANG stories that seemed to dominate Twitter earlier in the day. The OEF and SPY were the second and third best performers. The IWM was modestly higher -- a bit of a disappointment, which is also how I'd describe its chart:

Yes, prices did advance through resistance. But after gapping higher, prices moved modestly lower for the rest of the day. And there was a sharp sell-off at the end of the day, which means traders didn't want to hold onto positions overnight.

The QQQ is modestly better:

Prices gapped higher at the open but then moved higher on the day. They also moved through key resistance but also sold off at the end of the session. And prices remain just below the 200-minute EMA.

As for the SPY, notice that prices nearly made a round trip, closing near their opening price. The index was still up on the day but gave up most of the gains it made after the open.

The good news is prices moved through resistance. The bad news is prices sold-off sharply at the end of the day, which is a bearish development. And all prices remain below the 200-day EMA.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.