Year-End Trading: Pattern Recognition in Quiet Markets

Market Analysis - December 18, 2023

Key Concepts:

• Spider (SPY): An ETF tracking the S&P 500 index, representing broad market performance.
• IWM: An ETF tracking the Russell 2000 index, representing small-cap companies.
• Qubes (QQQ): An ETF tracking the Nasdaq 100 index, representing large-cap growth stocks.
• SMH: An ETF tracking the semiconductor sector.
• XLP: An ETF tracking consumer staples, considered a defensive sector.
• TLT: An ETF tracking long-term Treasury bonds, generally moving inversely to interest rates.
• LQD: An ETF tracking corporate bonds.
• GLD: An ETF tracking gold prices.
• SLV: An ETF tracking silver prices.
• PL: An ETF tracking palladium prices.
• SIL: An ETF tracking silver miners.
• UFO: An ETF tracking space and satellite companies.
• Price Gap: A significant price movement leaving a gap in the chart, often acting as support or resistance.
• Lifetime High: The highest price a security has ever reached.
• Distribution Zone: A price range where significant selling pressure occurs, indicating potential for a downtrend.
• Cup and Handle Pattern: A bullish continuation chart pattern.

I. Broad Market Overview

The market is experiencing a quiet period, likely to continue through the holiday season, lacking significant catalysts. Equity indexes are generally green, with the SPY up approximately 2/3 of a percent, recovering recent minor losses. However, indexes are not yet at lifetime highs, showing slow, directionless movement.

• Small Caps (IWM): Performing strongly, but also not at lifetime highs. A horizontal line is placed as a potential resistance level. The IWM is recovering from a previous decline on light volume.
• Qubes (QQQ): Weaker than both SPY and IWM, up 45% but failing to break a price gap. It’s unlikely to reach new highs before the end of the year.
• Semiconductors (SMH): Stronger than Qubes, up 1.32%, but experienced a failed breakout at a lifetime high and is currently consolidating below that level.

II. Portfolio Positioning & Sector Rotation

The speaker has minimal ETF positions, primarily focused on TLT (short position) and XLP.

• XLP (Consumer Staples): Performing negatively despite the overall market gains, down half a percent. This is attributed to investor preference for “sexier” growth stocks. XLP is weakening from a significant distribution zone dating back to last year.
• Rivian (RIVN): Fully exited from a position in Rivian due to a price gap, a decision considered prudent given the subsequent price decline (almost 2% on the day).
• Cash Position: Three out of five portfolios are currently 100% cash, reflecting a cautious outlook.

III. Interest Rate Sensitive ETFs & Homebuilders

Interest rate sensitive ETFs and the homebuilding sector are showing divergent behavior.

• LQD (Corporate Bonds): Exhibiting a similar reversal pattern to Treasury bonds, with a clean price gap. The speaker does not currently hold a position due to existing TLT positions.
• TLT (Long-Term Treasury Bonds): Down modestly, with a key stop-loss level identified at the current price. A tighter stop-loss could be placed at Thursday’s low (another price gap).
• Homebuilders (HB): Defying the overall market trend, continuing to decline with seven consecutive red bars, indicating ongoing weakness.

IV. Precious Metals – A Significant Rally

Precious metals are the most active sector, experiencing a substantial rally.

• Gold Futures: Up almost 2%, reaching approximately $4468. The speaker believes $5,000 gold in the first half of next year is plausible. The current move mirrors a similar base breakout in early September.
• GLD (Gold ETF): Breaking through a prior peak, indicating positive momentum.
• Gold Miners: Also experiencing gains, with a cup and handle pattern and a lifetime high.
• Silver & Gold Correlation: Silver and gold are moving almost identically, which is unusual.
• SLV (Silver ETF): At a lifetime high, up over 20% in the past month.
• PL (Palladium ETF): Experiencing a dramatic surge, up 61%, having been largely ignored previously. The speaker would ideally like to see a pullback to around $140 for a potential entry point.
• Platinum: Also showing strong gains, up almost 7%, breaking out from a cup and handle pattern.

V. Space Exploration & Rocket Companies

The space exploration sector is experiencing increased investor interest, driven by SpaceX’s potential IPO.

• UFO (Space ETF): Up about 5%, benefiting from the hype surrounding SpaceX.
• AS SpaceMobile: Up 13.5%
• Planet Labs (PL): At a lifetime high with a clean chart pattern.
• EchoStar (SATS): Approaching a lifetime high close.
• Rocket Lab (RKLP): Up almost 10%, a younger stock reaching a lifetime high.
• Firefly Aerospace: Recovering from a previous decline, benefiting from sector enthusiasm.

VI. Concluding Remarks & Key Charts to Watch

The speaker emphasizes the importance of monitoring bond market trends (ZB chart) and Nvidia (NVDA) as the year progresses. The ZB chart’s pattern suggests potential for further declines if it remains below Thursday’s high. Nvidia, as the largest company and a key driver of the AI boom, will be a critical chart to watch in the new year. The speaker anticipates a quiet period until earnings season and a surge of economic reports.

Notable Quote:

“The idea of $5,000 gold in the first half or even the first quarter of next year seems totally plausible.” – Regarding the recent surge in gold prices.