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Weekend headlines focused on new highs in the major market indexes. New highs in the fourth quarter are bullish, and any pullback should be treated as a buying opportunity.
Tech Stocks at 13-Year Highs
SPDR S&P 500 (NYSE: SPY) gained 2.43% last week and reached a new all-time high. PowerShares QQQ (NASDAQ: QQQ) gained 3.69% and closed at its highest price since November 2000. The monthly chart is shown below.
Traders often focus on daily or weekly charts. Monthly charts also offer valuable insights, and the chart of QQQ shows an uptrend and an upside breakout.
I've added a few notations to the chart that support the argument for higher prices.
Going back to the 2000 high, I have added Fibonacci retracement levels. Common Fibonacci numbers are 38.2% and 61.8%. Once prices retrace 61.8% of the decline, a bullish trend is confirmed. Friday's close of $82.15 is just above that level.
In 2008, the bear market formed a pattern that could be called a rounding bottom. The name of the pattern is less significant than what a price pattern tells us. In general, technical analysts look at patterns because they expect market moves to show at least some degree of symmetry.
An up move after a decline is expected to be equal in size to the decline, which means the difference between the high before the decline and the bear market low can be added to the high to provide a price target. Following that technique, we get a target based on the bear market bottom of $75.12, which has been exceeded.
After a target is reached, the next price target is a Fibonacci extension of the pattern. In this case, a 38.2% extension of the pattern provides a target of $89.90.
Finally, I have added a simple trendline that shows prices are moving higher. That could be the most important information on the chart. Higher prices are, by definition, an uptrend, and QQQ is bullish based on that.
There are a number of arguments that the bears will make to support their belief that prices will fall. But the chart shows that QQQ is a buy.
SPY is also a buy. New 52-week highs are bullish, and buying new highs in SPY would result in a winning trade 57.5% of the time, assuming you sell three months after buying.
The chart below shows October is the best month for this strategy, with winning trades seen 87.5% of the time. November is also bullish with 80% winners, and December highs lead to winning trades 77.8% of the time.
Until price action turns decisively lower, traders should remain bullish.
Gold Remains in Long-Term Downtrend
SPDR Gold Shares (NYSE: GLD) gained 3.47% last week. In last week's Market Outlook, I noted that GLD was oversold based on the two-day Relative Strength Index (RSI). That indicator became overbought as GLD moved up. I expect to see more volatile market action in gold over the next few weeks, but the direction of the trend is still down.
After several large price swings in recent weeks, CNBC offered some speculation about the manipulation of prices in the gold market. We should know more about who has been buying and selling gold when the Commodity Futures Trading Commission (CFTC) releases a Commitment of Traders (COT) report. That could happen in the coming week as the CFTC gets back to work following the partial government shutdown. Without data, there is nothing but speculation about who is moving the market.
For now, we do know that GLD remains in a downtrend. The chart below shows GLD with the 200-day moving average (MA) and 50-day MA. As long as prices remain below the 200-day MA, GLD is in a long-term downtrend. The intermediate-term trend is also down since prices are below the 50-day MA.
Trend-following indicators remain bearish on gold, and traders should not rush into positions.
This Week's News
It will be a busy week with scheduled economic news releases, catching up on delayed reports like unemployment, and a number of important earnings announcements.
Once a pillar of the American economy, this group is crumbling, and investors would be wise to avoid the rubble.
After a solid run, the technical evidence tells us shares are headed for a quick drop.
This sector is one of the few showing real growth, and there is an undeniable upside catalyst on the horizon.