S&P 500 CLEARS JUNE HIGH - SMALL-CAPS AND FINANCIALS LEAD - HEALTHCARE SPDR BREAKS FEBRUARY HIGH - DOW THEORY SIGNAL - DOLLAR HITS LONG-TERM SUPPORT - OIL FOLLOWS STOCKS - GOLD STALLS AFTER GAP
STOCKS EXTEND GAINS WITH BROAD ADVANCE ... Link for todays video. Favorable reactions to earnings reports continued to propel stocks higher. The major indices were all sharply higher on Thursday with small-caps leading the way higher. It is positive to see small-caps showing relative strength. All sectors were also sharply higher with materials and finance leading the charge. It is also positive to see the finance sector picking up some steam. Chart 1 shows the S&P 500 breaking above its June high and remaining overbought. Chart 2 shows the Nasdaq with its 12th consecutive advancing day. As far as I can tell, December-January 1992 was the last time the Nasdaq put together such a string. Chart 3 shows the Russell 2000 surging above its June high with a big move.
Chart 1
Chart 2
Chart 3
DOW THEORY SIGNAL... With the Dow Industrials and the Dow Transports both breaking above their May-June highs today, a Dow Theory buy signal has been triggered. A Dow Theory buy signal occurs when both close above their prior reaction highs. In this case, May (allegedly) marked the last reaction high for the Dow Transports, while June marked the last reaction high for the Dow Industrials. Chart 4 shows the Dow Industrials closing above its June high three days ago. Chart 5 shows the Dow Transports closing above its May high with a big surge today. These new reaction highs are testament to underlying strength in both averages. While these breakouts affirm the uptrends, both Averages are short-term overbought after very sharp moves the last 12 days.
Chart 4
Chart 5
DOW DEBATE AND THEORY... There will likely be some debate on this Dow Theory signal. The debate will likely center around the definition of the last reaction high (May-June versus January). Mark Hulbert of MarketWatch.com follows Dow Theory quite closely and will likely cover this subject in the coming days. The Dow represents the industrial side of the economy with a little technology (Microsoft, Intel, IBM, Cisco and Hewlett-Packard). The Dow Transports represent the movement of goods and people: railroads, truckers, air freight and airlines. Demand for transport services increases as the economy expands. When both Averages confirm one another it suggests that the stock market and the economy are firing on all cylinders.
HEALTHCARE STOCKS SURGE... Chart 6 shows the Healthcare SPDR (XLV) edging above its February high on Thursday. After a surge in mid March, the ETF has been working its way higher since April. The new high for 2009 affirms the current uptrend, but, like many other ETFs, XLV is short-term overbought after a 7% surge in two weeks. A little consolidation or correction is in order now. Within the healthcare sector, the biotech group stole the show on Thursday. Chart 7 shows the Biotech iShares (IBB) breaking above its February high with a big surge on Thursday. IBB is up over 10% in the last two weeks.
Chart 6
Chart 7
OIL FOLLOWS STOCKS HIGHER... Despite a strong start in stocks, oil actually opened down this morning and then followed the stock market higher. Chart 8 shows the US Oil Fund ETF (USO) finding support at the February trendline and the 62% retracement (green arrow). The ETF then surged around 10% over the last two weeks. The first resistance test is around 36. Resistance here stems from broken support and the confluence of two moving averages: the 200-day and the 50-day. Strength in the stock market and weakness in the Dollar are supporting the bullish case for oil. Strength in stocks translates into economic strength, which increases demand for oil. Weakness in the Dollar is generally bullish for commodities.
Chart 8
Chart 9 shows weekly prices for West Texas Intermediate ($WTIC) . Should the current rally continue, crude could hit the next resistance zone around 80-90. This zone stems from broken support and marks a 38-50% retracement of the prior decline. In a related note, Philip Verleger offers some bold predictions in a Bloomberg podcast and article. Hint: Verleger is probably watching support at 58 on the weekly chart.
Chart 9
DOLLAR FIRMS NEAR JUNE LOW... Despite unbridled strength in the stock market, chart 10 shows the Dollar Bullish ETF (UUP) firming near its June lows. UUP moved below 23.5 on Monday, but firmed and consolidated around this level the last three days. Even though the trend is clearly down, it is surprising to see the Dollar firm when stocks are strong. Strength in stocks usually gives way to weakness in the Dollar. At this point, the Dollar only shows signs of less weakness, not any real strength. In addition, 14-day RSI is trending lower and remains below 50. Key resistance is set at 24.25 and a break above this level is needed to reverse the downtrend. RSI needs to break above 50 to turn momentum bullish.
Chart 10
Chart 11 shows the US Dollar Index ($USD) trading near a pretty significant support area around 78. Broken resistance and two reaction lows combine to mark support here. Support is one thing. Strength is another. The index needs to surpass its June highs to show significant strength.
Chart 11
GOLD STALLS AFTER GAP... With the Dollar firming over the last few days, it is little surprise that gold is stalling. Chart 12 shows the Gold ETF (GLD) surging above the wedge trendline with a big gap last week. There was some follow through above 93 with another gap Monday morning, but GLD stalled after the gap. The gap is holding so far and gold remains in bull mode after last weeks breakout. There is a breakout zone around 91-92 that now marks a support zone. Failure to hold above 91 would be quite negative and call for a reassessment of last weeks breakout. Chart 13 shows the Gold-Continuous Futures ($GOLD) with a large head-and-shoulders and a large triangle. Gold bounced off triangle support over the last two weeks. This established support around 900. Long-term, a break below 900 would be bearish and a break above triangle resistance would be bullish.
Chart 12
Chart 13
