Morning Thoughts October 26

It was another choppy session yesterday…filled with rumors, fake-out moves, and some earnings disasters…see Netflix(NASDAQ:NFLX).

In the case of the S&P 500, the index yesterday put in an outside day and found support right at 1230, which of course is where it broke out higher from last Friday October 21.  The stochastics oscillator remains in overbought territory, suggesting the index may need to pause a little up here.  It is important to note however that oscillators can remain in their respective overbought or oversold territories for extended periods of time.  

Given how sharply the stocks in general lifted off the early October lows I see it as unlikely that we see those lows again anytime in the next few months.  Rather my base case remains that equities pause somewhat in the very near future, followed by higher prices into year-end.

One group of stocks that looks especially juicy for higher prices into year-end is the energy sector as measured by the SPDR Energy Sector ETF (NAR:XLE).  After falling hard in August and September the sector rallied sharply into a resistance area near $70, where it again couldn’t break through on Monday.  After some backing and filling I do expect the energy sector to push higher and above $70, possibly towards the $75 area.  Individual energy stocks may however offer better risk/reward than this index.

Gold and silver both rallied yesterday and broke out of their recent congestion areas ever so slightly.  Going long either metal here is far from a high-probability trade purely looking at the chart, but a solid daily close above $168 on the SPDR Gold Trust (NAR:GLD) may offer a better confirmed long-side entry signal. 

And then there are the European stocks, which by looking at Germany’s blue chip stock index, the DAX, are also coming into a smidge of resistance in the very near term.  Much like the major U.S. equity indices however, the DAX too has come quickly off the October lows and after last week breaking above the 38.2% Fibonacci retracement level of the July to October down-move may have room up to around 6500, which is where the 61.8% retracement line comes in.  The DAX will be an important index to watch and track if and when we push to higher levels as the Q4 rally continues after a brief pause in the immediate term.   

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