foxex: Breaking Bond

Chart Advisor | Focus on the Price

Friday, February 21, 2020

1. Bonds touch new highs as stocks slide

2. Did gold prices just complete a cup and handle pattern?

3. What Zillow investors should know

Market Moves

Bond prices rose and gold prices rose even more as both the Nasdaq 100 index (NDX) and the S&P 500 index (SPX) slid more than one percent to close out the four-day week. Utility stocks held their ground, while gold stocks and bond funds advanced, confirming that investors are beginning to adopt a more conservative posture.

The chart below uses a blue line to compare iShares' 20-year Treasury index ETF (TLT) with candles made by the 10-year Treasury note yield (TNX). The scale on the left reflects the price of the ETF, while the scale on the right reflects the interest rate of the 10-year note (click on the graphic for a larger image). Because bond prices and yields (rates) move in opposite directions, it is no surprise that both charts show a mirror-image of a wedge pattern, with the areas of a missed touch and a pattern breakout highlighted on each.

Astute chart watchers realize that the final move the pattern forecasts is for the price action to make a new extreme (high and low respectively). The implications of this are interesting because the Fed is not planning on lowering rates this year. Why is the market offering lower rates? Mostly because people are willing to pay higher prices for bond funds. That translates into nervous investors, and that translates into trouble ahead for stocks.

Did Gold Prices Just Complete a Cup and Handle Pattern?

Among technical analysts and traders, few patterns are worthy of mention in polite company (that is to say in the company of old-school financial professionals), but the cup and handle pattern is one of them. Perhaps out of respect for William O'Neil, or maybe because the pattern is interesting, but whatever the reason, when this chart pattern comes along, it seems that everyone wants to know about it. And quite frankly, everyone should want to know about this latest iteration.

The chart below reflects something you don't see every day, a cup and handle pattern generated based on moves in the price of gold. Many stocks associated with the price of gold are showing a similar pattern as well, and for this example the chart shows the VanEck Vectors Junior Gold Miners ETF (GDXJ). This particular ETF shows an easy-to-follow example of the pattern (click on the graphic for a larger picture).

To understand the nuances of this pattern and how some traders like to work with it, be sure to check out an explanation of new ways to trade it. In this case, the pattern is strictly horizontal and gives the appearance of having completed a breakout, from which it is forecast to go higher. The importance of this pattern for chart watchers is the implicit forecast that gold prices could go much higher. If so, it follows that the markets are in turn forecasting something that could possibly drive investors away from stocks.

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What Zillow Investors Should Know

In a market where investors are tipping their hand about how nervous they are, it is interesting to find a stock rocketing to new highs that isn't Tesla (TSLA) or Virgin Galactic (SPCE). Zillow Group (ZG) jumped 20 percent yesterday and tacked on another two percent today as a follow up to its earnings news. The news was better than expected, that is to say, analysts were surprised that the company didn't lose as much money as projected. (Doesn't that last sentence seem like it should be followed by a rim-shot sound effect and recorded laughter from a studio audience?)

Zillow's new initiative of jumping into the "We-buy-ugly-houses" game means that the company could easily find a highly valuable, if transitory, collection of assets on its hands. Investors and analysts feel confident that with all that money going across their table, the company will find a way to keep some of it. The trouble here is that they haven't yet.

The impressive performance recently (100% increase since the last earnings statement) should be tempered by the fact that twice within the last two years the stock has lost approximately half its value. This stock has a lot of fluctuation and investors should go into it with eyes wide opened.

The Bottom Line

Stocks slid today but unlike yesterday they didn't rebound midway through the trading session. The price action signaled the largest decline so far this year. Gold and bond prices jumped higher and interest rates fell revealing the nervousness of many investors. Despite an otherwise nervous market, Zillow Group investors seem to be as optimistic as they can be.