This weekend's G-20 meeting between Donald Trump and Xi Jinping should be the year's biggest market mover, writing the next chapter in a slow-moving political drama that now stretches across 17 months. The outcome of this binary scenario will also set the tone for the summer trading season, generating a big rally that hits new highs or a painful decline that brings 2018 lows back into play.
Next week's price action in a basket of financial instruments should expose the long-term impact, following weeks of demands, rumors, and misdirection by both superpowers. Bonds, gold, and the chip sector should do the trick for most of us because these markets have made big moves since trade talks broke down in April. And in case you've forgotten, bond and gold futures will be open on Sunday night, offering a preview of coming attractions.
The iShares 20+ Year Treasury Bond Fund (TLT) mounted the 2008 high at $123.15 in 2011 and entered a choppy uptrend that posted nominal new highs in 2012, 2015, and 2016. It fell to a four-year low at $111.90 in November 2018 and turned higher, reaching 2017 resistance near $130 in May 2019. A June breakout added four points and eased into a holding pattern that should end next week with higher highs or a major downturn.
The seven-month uptrend has stalled at the .618 Fibonacci retracement level of the 2016 into 2017 decline, while the on-balance volume (OBV) accumulation-distribution indicator has lifted to an all-time high. This is less bullish for a bond fund than a stock or commodity fund because it indicates that the long trade has become over-crowded, setting the stage for a reversal and shakeout of weak hands.
The SPDR Gold Trust (GLD) posted an all-time high at $185.85 in 2011 and broke down from a double top pattern in 2013, entering a steep downtrend that bottomed out near $100 at the end of 2015. The fund and futures contract completed a six-year basing pattern earlier this month and broke out, zooming to the highest high since 2013. Accumulation has surged along with price, with OBV lifting to a seven-year high.
The rally has reached the first upside target at the .382 Fibonacci sell-off retracement and August 2013 swing high, raising the odds for a consolidation and possible retest at new support near $127. However, a weekend catalyst could expand this buying wave up to the 50% retracement level above $140, or above $1,500 on the futures contract. Keep close watch on the weekly stochastic oscillator next week because a bearish crossover could coincide with an intermediate reversal.
The VanEck Vectors Semiconductor ETF (SMH) finally completed a round trip into the 2000 high at $105.75 in November 2017 and sold off after a failed 11-month breakout attempt. It dropped to a 20-month low in December and turned sharply higher, returning to the 2018 peak in April 2019. The subsequent breakout added six points in six days before reversing and reinstating multi-decade resistance levels.
OBV has collapsed in the past two months, signaling an aggressive exodus by institutions and other smart money players. This selling pressure makes perfect sense after multiple rejections at multi-decade resistance because it favors sharply lower prices. In turn, this is a dangerous sector to own in the coming months because the uptrend that started in 2009 may have finally come to an end.
The Bottom Line
Traders and investors looking for clues to market direction after this weekend's Trump-Xi meeting should watch bonds, gold, and the chip stocks because they've all attracted big bets on the future of Chinese trade.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.