QQQQ RALLIES BACK -- YEN ETF CONFIRMS DOUBLE TOP -- NIKKEI TESTS OCTOBER LOW -- OIL SURGES FROM OVERSOLD LEVELS -- XLE AND OIH FAIL TO FOLLOW OIL HIGHER
STOCKS RECOVER FROM LOWS... Today's Market Message was written by Arthur Hill. - Editor
Stocks dipped sharply lower in early trading, but staged a tech-led comeback in the afternoon. Nothing has changed on the daily charts, but I did notice a couple of interesting patterns on the intraday charts. Caveat emptor applies! Chart 1 shows 30 minute bars for the Nasdaq 100 ETF (QQQQ) over the last 10 days. There are two scenarios developing here. The first is an inverse head-and-shoulders reversal with neckline resistance around 29.20. A break above this level would argue for further strength towards gap resistance around 30. The second scenario is a bearish flag or wedge. Bull flags and wedges slope down as corrections. Bear flags and wedges slope up as counter-trend bounces. A break below today's lows would reverse the flag/wedge and call for a continuation of the prior decline.
Chart 1
Chart 2
YEN BREAKS SUPPORT... The Japanese Yen Trust ETF (FXY) broke double top support with a sharp decline over the last few weeks. Bad economic news out of Japan triggered selling pressure in the yen. Japanese exports were down 35% in December and 45.7% in January. As an export driven economy, these drastic declines are taking their toll on investor confidence in Japan. The yen appears to be losing its status as a safe-haven currency. Chart 3 shows a 6-month performance chart for the Dollar, Euro and Yen ETFs. The dollar has been moving higher since mid December, the euro has been moving down since mid December and the yen fell sharply over the last few weeks. Chart 4 shows the Japanese Yen ETF with resistance around 115 and support at 105. With two relatively equal highs, the break below intermittent support confirms a double top. Based on traditional technical analysis, the height of the pattern is subtracted from the break. This projects a downside target to around 95. Chart 5 shows weekly bars over the last two years. The trend line extending up from June 2007 extends to the 95-97 area over the next few months.
Chart 3
Chart 4
Chart 5
NIKKEI TESTS OCTOBER LOW... The Japanese Nikkei 225 ($NIKK) remains in a downtrend as it tests its October low. Chart 6 shows this index well below its falling 40-week moving average. After failing at the 40-week line in June, the index fell sharply in September-October. The index established its low a month ahead of the S&P 500, which bounced in late November. Chart 7 shows daily bars over the last six months. The index broke triangle support in January and declined to its October low this month. Buoyed by a surge in the US market on Tuesday, the Nikkei bounced with a 2.65% surge on Wednesday. However, this one day bounce is not enough to reverse the bigger downtrend. In an interesting twist, exporters led the way higher on Tuesday because a falling yen makes exports more competitive. Again, it is just a one-day bounce in a well established downtrend. More is needed to consider a trend change.
Chart 6
Chart 7
OIL SURGES FROM OVERSOLD LEVELS... The United States Oil Fund ETF (USO) surged over 6% on Wednesday as the Energy Department reported a drop in gasoline supplies. Despite such a big move, this is still considered an oversold bounce within a bigger downtrend. The bottom indicator window shows RSI(14) moving below 30 to become oversold last week. Notice how often RSI moved below 30 from September to December. Oversold readings can sometimes foreshadow a bounce, but they also reflect underlying weakness. Weak securities are more apt to become oversold. On the price chart, a broken support zone around 28-30 turns into the first resistance zone to watch. This zone is also confirmed by the falling 50-day moving average.
Chart 8
ENERGY ETFS MOVE LOWER... With a big jump in oil, I would have expected some upside leadership from the Energy SPDR (XLE) and the Oil Service HOLDRS (OIH). This was not the case as both fell on Wednesday. Chart 9 shows XLE testing support around 40 for at least the fifth time since October. The ETF has been locked in a trading range for four months now. Chart 10 shows a longer perspective with the weekly chart. The pattern at work here looks like a triangle and XLE broke the lower trend line over the last three weeks. This break favors a continuation lower.
Chart 9
Chart 10
Chart 11 shows weekly prices for the Oil Service HOLDRS (OIH). The ETF fell over 70% from June to December before finding some support around 70. OIH managed to stabilize over the last few months, but remains short of a breakout that would signal some real strength. On the daily chart, OIH had an ascending triangle working, but never broke above resistance at 90. Instead, the ETF declined sharply over the last two weeks and broke the December trend line. Despite support around 70, the inability to bounce with oil reflects underlying weakness.
Chart 11
Chart 12
