Technically Speaking For The Week Of November 5-9

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Includes: IWM, QQQ, SPY
by: Hale Stewart

Summary

Oil has entered a bear market.

Expect the Fed to raise rates at their last meeting this year.

While the markets had a good week, I think the IWM is signaling that the market is moving lower as we end the year.

Never thought I'd say this anytime soon: oil has entered a bear market.

From an absolute high of 76.9 to its Thursday close of 60.67, it has fallen 21%. The decline has been consistent -- lasting for slightly over a month -- and is a great example of a "lower low, lower high" decline. Momentum has dropped like a stone, the shorter EMAs are moving lower and are bearishly aligned (the shorter EMAs are below the longer EMAs, save for their relationship with the 200-day EMA), and the 10 and 20-day EMAs have crossed below the 200-day EMA. Oil's chart is now very bearish.

Why is this happening? There are several reasons. First, oil rose in anticipation of the new Iranian sanctions hurting global supply. While the U.S. has reimposed sanctions, the Trump administration has also granted a number of key waivers, including China, India, and South Korea. Saudi Arabia and the U.S. have increased production, adding to global supply. And the FT reported on Friday that Iraq is close to cutting a deal for its oil exports. Combined, these events have caused the sell-off.

The Federal Reserve met this week but didn't raise rates. However, there is a big change in how they described the economy [emphasis added]:

Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.

The Fed is very circumspect in how they describe the economy, out of fear that their words will start something they don't intend. For most of this expansion, their favorite adjectives were modest and moderate. In the above paragraph, they use the adjective "strong" in some capacity four times. If there was any doubt about what will happen at their last meeting this year, it's gone: rates are likely going up an additional 25 basis points in December.

Has the labor market completely healed? A quick look at the Atlanta Fed's Labor Market Spider Chart would lead to a "mostly" answer. But there are a few underlying problems that continue. This chart from the FRED blog shows that the duration of unemployment remains stubbornly high:

As explained on the blog:

The share of long-term unemployment is significantly higher than in any other post-WWII period. Indeed, those unemployed for more than 6 months (in green) still represent over 20% of the unemployed, after a peak of over 45% in 2011. This share increases after recessions, but the most recent recession was deeper and much longer than the others. It’s also well-known that the long-term unemployed have a much harder time finding a job, leading to a catch-22 situation for them. And thus their numbers still persist at a high level.

And then we have the participation and employment rate of the prime-age labor force:

The participation rate for the 25-54 crowd (top chart) is still below the lowest level of the last expansion. The employment rate (bottom chart) only recently moved through the lows of the last expansion. In other words, things are largely better. But there are still some concerning trends that we need to pay attention to.

So, let's turn to this week's performance table:

On the surface, it looks like a great week. But that's modestly deceiving. The bigger indexes did extremely well -- the DIA was up a little over 3%; the OEF was up 2.35%, and the SPY rose a little over 2%. But the IWM was at 0% and the IWC was down modestly. This was a clear risk-off scenario, which is evident from the weekly charts:

Prices rallied on Monday and Tuesday, then formed a rounding top on Wednesday and Thursday. Prices gapped lower at the open on Friday, sold-off to the 50% Fibonacci line, and then staged a modest (and encouraging) rally towards the close. All-in-all, a good week.

The IWM had a stronger rally during the first four days of the week but then sold-off very sharply on Friday, erasing the week's gains in a single trading session.

Let's turn to the daily charts to get a read on how we're faring after all the activity over the last few weeks:

The SPY has rebounded through the 200-day EMA and hit the 61.2% Fib level.

The QQQ is right around the 200-day EMA ...

While the IWM remains below the 200-day EMA.

It's really the IWM chart that I think holds the keys to the future market direction. The shorter EMAs are below the 200 while the 50 is getting ready to move below that line. And, most importantly, the 200-day EMA is trending lower as well. I still think we're moving lower as we head to the end of the year.

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.