FINANCE SECTOR DRAGS THE MARKET LOWER -- USING RSI TO DETERMINE THE TREND -- BANKS AND BROKERS REMAIN LAGGARDS -- MERRILL AND JP MORGAN GAP DOWN -- GOLD AND SILVER ATTRACT BUYERS -- ST JUDE MEDICAL HITS 52-WEEK HIGH
FINANCE LEADS THE WAY LOWER... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
Of the nine sector SPDRs, the Finance SPDR (XLF) lost the most on Wednesday and dragged the market lower. Continuing problems with sub-prime loans were to blame with big banks and big brokers taking a hit. On the price chart, the Finance SPDR (XLF) broke its 200-day moving average in late June and trading then turned volatile as the ETF moved above and below the 200-day over the last few weeks. With today's sharp decline, this key sector SPDR is back below the 200-day and looking mighty weak. In fact, the Finance SPDR is the ONLY SPDR trading below its 200-day. Even the Utility SPDR (XLU) remains above its 200-day and Finance is clearly the weakest sector. Finance is also the biggest sector in the S&P 500 and relative weakness in Finance is like running with a ball and chain.
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XLF AND RSI... There are several ways to use RSI and my preference is to look for crosses above and below 50. In general, momentum favors the bulls when RSI is above 50 and the bears when RSI is below 50. In addition, 50 acts as support in an uptrend and resistance in a downtrend. While 50 represents the exact middle and a clear line in the sand, a little judgment is also required to validate momentum changes. Technical analysis is part science and part art. This is where the art part comes into play. Sometimes I will add a buffer and require a move above 55 to turn bullish on momentum or a move below 45 to turn bearish.
Turning back to the Finance SPDR (XLF), RSI broke below 40 in early June and this breakdown turned momentum bearish. At this point, 50 became resistance and trouble was expected in this area. RSI did break above 50 in June, but never made it above 53 and soon turned lower. The bounce over the last few weeks met resistance at 50 from Friday to Tuesday and RSI turned lower today. The ETF has resistance at 37 from the July high and 31-May trendline while RSI has resistance at 50. Both need to be broken to reverse the current downtrend.
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BROKERS AND BANKS WEIGH... The Banking Index ($BKX) met resistance at its 50-day and 200-day moving averages earlier this week and dropped sharply on Wednesday. Looking back, the index declined sharply in February-March and bounced with a rising wedge. This pattern is typical for a counter-trend rally and BKX broke wedge support in June. The index also moved below both the 50-day and 200-day moving averages. This looks like a continuation of the February-March decline and the downside projection is below the March low. The February trendline and moving averages mark resistance around 116-117 and it would take a move above this level to reverse the current downtrend.
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I featured the Broker Dealer iShares (IAI) chart last week and showed how this ETF was lagging the S&P 500 since January. The ETF never made it above its January-February highs and formed a lower high in July. IAI gapped down today and further weakness below 54 would break the 200-day moving average, which held in March and late June. Support at 54 held in May and June, and we should watch this level closely in the coming days. Brokers are at the very heart of Wall Street and relative weakness in this key group is not a good sign for the market overall.
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MIND THE GAPS... Merrill Lynch (MER) is one of the leading brokers and JP Morgan (JPM) is one of the leading money-center banks. Both gapped down today and led the Finance sector lower. MER surged early Tuesday after a strong earnings report. However, the stock could not hold these early gains and closed down for the day. Also notice that MER met resistance from both the 50-day and 200-day moving averages on Tuesdsay. The stock gapped down today and this reinforces resistance around 89. JP Morgan (JPM) gapped down and broke below its 200-day moving average during the day. The stock has been battling the 200-day since late June and managed to close above this key indicator on Wednesday. Nevertheless, today's gap reinforces resistance around 50.5 and it would take a break above this level to revive the bulls.
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GOLD AND SILVER SHINE... Gold and silver provided a few bright spots in the market today. There are a number of positives coming together for gold right now. The US Dollar Index broke down last week and remains weak. Oil surged over the last seven weeks and this has rekindled inflation fears. The sub-prime problems could also be helping gold as confidence in the US Dollar and US economy wanes.
The StreetTracks Gold ETF (GLD) surged over 1% and moved further above its 50-day moving average. The ETF broke the upper trendline of a falling wedge and exceeded the mid June high over the last two weeks. This breakout is holding and it should be treated as bullish until there is proof to the contrary. The next resistance area is around 68-69 and this is the upside target. The iShares Silver Trust (SLV) surged over 2% today and broke back above two key moving averages. I think you can guess which two moving averages. The ETF looked like it was breaking down in late June, but recovered with an impressive advance the last three weeks and the bulls are getting back on track.
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ST. JUDE SURGES ON GOOD VOLUME... St. Jude Medical (STJ) provided another bright spot in today's market with a surge to resistance from its May high. The stock surged in April and then formed a correction-consolidation in May and June. I call this a correction-consolidation because it looks a little like both. The stock declined back to 41 (~10%) and this represents the correction part. This decline was quite choppy and this resembles a consolidation. The stock exceeded the May high today and hit a 52-week high. This is bullish price action and St. Jude is showing some leadership to boot.
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