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This week finally brought about a touch of much-needed selling in the broad market. Tuesday’s bearish gap was the first warning sign that something could be amiss in the land of the bulls. The markets, minus IWM, have been in a relentless up trend all year long and SPY was forming one of the tightest and longest wedges ever seen. The lower trend line of the wedge is up for much more interpretation than the upper trend line, so we have drawn our favorite two in the chart below. Either way you draw it, this rising wedge has broken down in a very resolute manner.
The RLT Newsletter has been cautious for quite some time. The key word there is cautious, not bearish. The has been a multitude of reasons to be cautious since about mid-February. First of all, the market is extremely extended, and everyone can see that. The SPY has not touched the 50DEMA in 154 days, the 3rd longest run in history. During this historic run the SPY has produced picture-perfect divergence and waning momentum that first started in December of 2023.
There have been a variety of charts signaling caution for the equities markets over the past few months including gold (GLD), silver (SLV), bitcoin (BTCUSD), bonds (TLT) and energy (XLE). The reason that the XLE chart could be bearish for equities is one simple word, inflation. If oil gas and energy prices rise, inflation will not drop like the Fed is hoping. If inflation does not drop, the rate cut and soft-landing narrative is in jeopardy. The charts in the energy sector have looked bullish since mid-February, when XLE held its lower trend line and the inverted head and shoulders broke out. In fact, the February 15th candle on XLE is when the RLT Newsletter started banging the bullish drum on oil. It looks like energy could use a pullback for sure, but the overall move does not look complete. CPI numbers will be released next week and if inflation continues to tick back up, the Fed will be stuck between a rock and a hard place.
Speaking of rocks, gold is the next chart that has been dropping hints about the underlying anxieties of market participants. Gold is seen as an inflation hedge, a hedge against uncertainty and a hedge against bad monetary policies. Gold recently broke out and moved nearly 10% higher over the last month. Its breakout from a four-year channel is one of the prettiest breakouts we have seen since NVDA broke out in early January. Silver has also broken out of its massive triangle pattern with a beautiful weekly gap. We have been talking about SLV and GLD for months now and this Tuesday may have been the last epic, high probability, great risk reward entry that SLV offers. If it pulls back and retests the triangle breakout that’s great, but gold has not been so kind to dip buyers and silver may not be either. Here is a chart of what GLD did after the breakout overlaid on SLV.
Bitcoin, sometimes called digital gold, has some similar properties to gold and is also seen as a hedge against inflation, government incompetence, bad monetary policy and overall uncertainty. Bitcoin has been pumping for many reasons but the main two are the new bitcoin ETFs and the upcoming bitcoin halving. The best-case scenario for bitcoin bulls is that a selloff in equities causes the recent ETF buyers to sell, or at least stop buying for a minute, allowing bitcoin to dip below $60,000 once again. The bitcoin halving could also act as a sell the news event, similar to the ETF approvals, giving dip buyers one last chance to snag some sats.
TLT has been trending lower all year long as the 20-year and 30-year yields have been trending higher. When we look at the chart of 30 year yields, it could easily be interpreted as a B wave in a larger corrective pattern. This means that the pattern would complete with a swift C wave lower taking yields into the mid threes once again. That is what should happen if inflation is a thing of the past. On the other hand, the chart could also be interpreted as an ascending triangle that has broken out, closed above all long-term moving averages and is ready to push higher. To sum up, if TLT continues to fall from here, the bond market has decided inflation is sticking around. If TLT resumes its uptrend, confirming a bull flag, the bond market is signaling that inflation is so 2023.
Whether or not this week’s price action is the start of a larger retest remains to be seen. It certainly seems like it is but SPY could just as easily find support around $508.00 and push once again into new highs. The risk reward was/is surely there for the quick bearish 10EMA trade on SPY. But if the market doesn’t retest now, it will; we just have to be patient.