Did The Reversal On The Job Report Change The Market’s Trend?

There have been many curve balls for the stock market this year and that has been the case for the past two weeks. The October job report caught the market by surprise. The prevailing wisdom was that a much lower job number was needed to turn stocks higher. The fact that stocks moved higher despite the much stronger jobs report surprised most analysts..

The “higher for longer” outlook for rates did not stop stocks from moving higher early last week but the higher-than-expected Producer Price Index on Wednesday got the bond market’s attention. Even though the CPI on Thursday was only a bit higher than expected yields were sharply higher.

The daily chart of the 10-year T-Note yield shows that yields gapped lower on Tuesday as bonds did not trade on Monday. They were also lower on Wednesday, closing at 4.595%, as the MACD and MACD-His both turned negative. On Thursday, the yield soared to a high of 4.728% which resulted in stocks moving lower as the S&P 500 and Nasdaq Composite were both down 0.6%. The stock market selling was even heavier on Friday while the 10-year yield traded in a narrow range.

Technically the yield on the 10-year T-Notes looks ready to move lower, not higher. After such a dramatic rally tops often take more time before they are completed. There is converging support, lines a and b, in the 4.346 % area which is a likely downside target. The yield on the 30-Year T-Bond also appears to have topped out, closing at 4.773%, down from the October 6^th high of 5.053%. The 2-Tear Yields remain in a narrow range.

So was the unexpected reaction to the jobs report on October 6^th significant or not?

The S&P futures dropped 50 points in an early reaction to the jobs and then moved higher for the rest of the day. The panels of economists on the financial networks debated how they went wrong in their jobs analysis and also tried to explain why then stocks closed higher.

The price action on July 27^th led to my discussion of key reversals that are not very common but in my experience are often quite good in identifying key turning points. That was the case in July as the “ S&P 500 opened 31 points higher at 4598 reached a high of 4607 but then closed at 4537 which was below the low of the previous four days.” Over the next sixteen trading days, the S&P declined 4.4%.

On October 6^th, the S&P 500 traded below the prior day’s low and reached 4219 before closing the day strong at 4308. That was above the prior four-day highs. The strong gain for the day was widely discussed but few seemed to notice another daily reversal price pattern.

It had been a rough September based on the sector’s performance as only energy was higher up 2.4%. Many sectors had historically large declines with real estate down 7.23% and technology declining 6.45%. Seven of the eleven sectors were down over 4%. Communication Services was the second-best sector in September, down just 2.9%.

There were signs in the price action ahead of the jobs report that some sectors were acting better at the start of October. This chart looks at the % change from the October 3^rd lows. In red, XLC was the strongest as it had a change of 5%. XLK was the next strongest but both have done considerably better than the QQQ (in blue). SPY (in black) has been lagging behind the other three ETFs. This positive performance translated into bullish RS signals before the jobs report.

As of the close on October 6^th, there were also positive signs on the weekly charts. The Technology Select (XLK) had formed a doji with the close on September 29^th (point a) Therefore the close on October 6^th at $168.22 triggered a weekly doji buy signal as the close was above the doji high. The weekly relative performance analysis (RS) was above its WMA indicating that XLK was a market leader.

The weekly chart of the Communication Services (XLC) reveals a similar corrective pattern from the July highs as XLK. Both appear to be continuation patterns or pauses in the overall positive trend. XLC also formed a doji at the end of September (point b) as the 20-week EMA was tested. The weekly RS made a new high the week of the jobs report and has benn in a strong uptrend in 2023.

Before the jobs reports, there were other positive signs (see Tweet) about which stocks and ETFs were likely to lead on a market rally, especially $QQQ, $XLC, and $XLK. This was based on the daily RS and OBV analysis that turned positive on October 4^th.

So what about now? The decline late in the week dropped a majority of the daily A/D lines below their MAs. The action early this week is like to be more important. Let’s look at the charts

The daily chart of the Invesco QQQ Trust (QQQ) shows that last week’s high at $373.74 just reached the downtrend, line a, and fell short of the R1 at $375.24. The two-day decline has dropped QQQ back to the 20-day EMA at $364.79. The monthly pivot is at $363.30.

A break of these levels early Monday is possible as stocks closed weak on Friday but it is the close Monday and Tuesday that are more important. The daily RS broke its downtrend, line b, on October 2^nd, signaling it was a market leader. The RS declined last week but is still above its EMA and support.

The Nasdaq 100 A/D line did not make new lows in late September and then rose sharply above its EMA. A close in the A/D line above the resistance at line c will confirm that the correction is over. The McClellan Osc on the Nasdaq 100 formed a strong month-long bullish divergence, line e, at the lows. It then broke its short-term downtrend. This divergence is typically a reliable bullish signal.

In summary, a further decline in yields, especially in the 10-Year T-Note, looks likely and will support the view that yields have peaked. This should relieve the pressure on the stock market but positive A/D numbers this week are needed to confirm that the correction is over.