SPY VOLUME SHRINKS AN EXTREME FOR STOCKS ABOVE THEIR 50-DAY GLD BOUNCES OFF THE 200-DAY MOVING AVERAGE OIL AND ENERGY STOCKS LAG THE BROADER MARKET DOLLAR ETF RECAPTURES THE 50-DAY

SPY EXTENDS HIGHER ON LOWER VOLUME... Despite a clear uptrend since early March, the current rally in SPY is getting stretched as volume declines and overbought conditions extend. Chart 1 shows the S&P 500 ETF (SPY) with a 28-day rally since early March. All told, SPY is up around 30% in six weeks with pullbacks lasting just 1 to 2 days. We do not need indicators to tell us that SPY is overbought. The mere timeframe (28 days) and percentage advance (~30%) provide enough evidence. Despite getting stretched, the uptrend is in good shape as long as pullbacks are limited to three days or less. A pullback that extends more than three days could signal the start of an extended correction.

Chart 1

SPY volume and the volume oscillator are displayed in the indicator windows. SPY represents a broad market index (S&P 500) and is often the most actively traded ETF. This makes it a fair proxy for overall volume flows. Volume was above average when SPY advanced from early March until April 2nd. Even though SPY continued higher the last two weeks, volume fell on April 3rd and remained below average the last two weeks. Rising prices and falling volume is not a bullish combination. The bottom window shows the Percentage Volume Oscillator (5,200,1), which shows the percentage difference between the 5-day EMA for volume and the 200-day EMA for volume. Volume is below average when the oscillator is negative and above average when the oscillator is positive. The recent move into negative territory confirms low volume over the last two weeks. Despite a clear uptrend for SPY, waning volume suggests that the bulls may run out of steam sooner rather than later.

PERCENT OF STOCKS ABOVE THE 50-DAY HITS AN EXTREME... There are many ways to measure breadth. We can use the AD Line, AD Volume Line, Net New Highs, stocks above their 50-day moving average or stocks above their 200-day moving average. Charts 2 and 3 show stocks above their 50-day moving averages for the Nasdaq and NYSE. Both indicators are above 75% and at their higher levels in over two years. This tells us two things. First, this rally was strong  very strong. Such strength often suggests that the rally will last for a several months. Second, the stock market is overbought. This means we are likely to see some sort of correction before continuing higher. On the NYSE chart, surges to around 80% foreshadowed peaks in October 2007, May 2008 and January 2009.

Chart 2

Chart 3

GLD TESTS THE 200-DAY ... The Gold SPDR (GLD) has had a rough few weeks, but support is at hand with a potentially bullish setup emerging. First, let's look at weekly prices on chart 4. GLD hit resistance around 97-100 three times in the last 13 months. While the recent decline from resistance looks sharp, a big inverse head-and-shoulders pattern could be emerging. The left shoulder formed in April 2008 with a low around 84. The head formed with the October-November lows. A right shoulder is now possible with a low around 85. Notice that the shoulder lows are about equal. As John Murphy noted last week, head-and-shoulders patterns have a certain symmetry. Should a right shoulder be forming, we can then expect a low near the low of the left shoulder.

Chart 4

Chart 5 focuses on the right shoulder as GLD hits potential support from the 200-day moving average. In addition, there are a number of features that suggest the current decline is a correction within a bigger uptrend. First, the decline over the last two months formed a falling wedge. Second, the decline retraced around 50% of the prior advance. Third, the decline traced out an Elliott Wave ABC pattern. GLD bounced in early trading on Monday and this is a good start to a successful support test. A break above the wedge trendline and 50-day moving average would argue for another assault on the 100 area, which is equivalent to $1000 in gold.

Chart 5

OIL AND XLE ARE LAGGING... While the major stock indices moved to new highs over the last two weeks, oil and energy stocks lagged and did not break above their March highs. This shows relative weakness that could turn into a negative over the next few weeks. Chart 6 shows the United States Oil Fund ETF (USO) advancing from late February to late March. A rising flag retraced around 62% of the prior decline (Jan-Feb). It looked as if oil would move higher after the 2-April gap, but USO failed to follow through on the gap and broke back below its 50-day moving average early Monday. Chart 7 shows the Energy SPDR (XLE) meeting resistance around 47 over the last four weeks. The bottom indicator shows the relative strength comparative, which compares the performance of XLE to SPY. This indicator peaked in late March and moved lower over the last four weeks. Relative weakness often precedes absolute weakness.

Chart 6

Chart 7

DOLLAR PERKS UP... Strength in the U.S. Dollar could be contributing to weakness in oil. Chart 8 shows the US Dollar Bullish ETF (UUP) surging back above its 50-day moving average in early trading on Monday. With the advance over the last four days, the Dollar has recovered almost the entire 18-March plunge. In its policy statement on 18-March, the Fed announced that it would buy $300 billion on US Treasuries, some $750 billion in agency-backed mortgages and another $100 billion in agency debt. News of this $1.25 trillion quantitative easing (QE) package sent bonds sharply higher and the Dollar sharply lower. The ability to recover in the face of bearish news is bullish. While there are plenty of reasons to be bearish the Dollar, the forex market is perhaps finding more reasons to be bearish the Euro and Yen. Chart 9 shows the Euro ETF (FXE) breaking back below its 50-day moving average. Chart 10 shows the Japanese Yen Trust ETF (FXY) battling its 200-day moving average with a rising flag over the last two weeks.

Chart 8

Chart 9

Chart 10