SPY TRACES OUT POSSIBLE BROADENING FORMATION - BONDS CLOSE STRONG - CONSUMER DISCRETIONARY SPDR CONTINUES TO LEAD - FINANCE SECTOR SPDR HOLDS BREAKOUT - SCHWAB AND MORGAN STANLEY SURGE - REGIONAL BANK ETF BREAKS RESISTANCE
OVERBOUGHT CONDITIONS REMAIN... Link for todays video. The major index ETFs have remained overbought for two weeks now. Charts 1, 2 and 3 show the S&P 500 ETF (SPY), Nasdaq 100 ETF (QQQQ) and Russell 2000 ETF (IWM) with the Commodity Channel Index (CCI). John Murphy and I have been featuring CCI over the past week. CCI moved above 100 on 16-July for QQQQ and above 100 on 15-July for IWM and SPY. With the indicator remaining above 100 again today, it has been overbought for 11-12 days now. Even this overbought condition is getting overextended. Notice how the advance just continues to edge higher as long as CCI holds above 100. A move below 100 would be the first sign of a pullback.
Chart 1
Chart 2
Chart 3
A broadening formation could be taking shape for SPY. Notice how SPY forged a lower low in early July and a higher high in late July. The lower low shows an increase in selling pressure since the May low, but this is offset by the higher high, which shows an increase in buying pressure since early June. The swings are getting wider with this lower low and higher high. For now, the swing within the broadening formation remains up. A break below swing support would start a correction that could retrace 50-62% of the July advance. With this July advance measuring 13-14%, a 50% retracement would be significant.
BONDS CLOSE STRONG... The 20+ Year Treasury ETF (TLT) and the 7-10 Year Treasury ETF (IEF) surged ahead of the GDP report on Friday morning. These charts were shown on Wednesday, but I will review these with todays price action. Chart 4 shows TLT with a break above the wedge trendline today. Even though there is still the matter of resistance around 94, bonds are perking up as the stock market looks vulnerable. Chart 5 shows IEF closing above 90 after a weak open. Notice that a sizable white candlestick formed today. The ETF has yet to break the wedge trendline, but it usually follows the 20+ Year Treasury ETF.
Chart 4
Chart 5
CONSUMER DISCRETIONARY SPDR SURGES ... Led by continued strength in retail stocks, chart 6 shows the Consumer Discretionary SPDR (XLY) breaking a four day consolidation on Thursday. Notice how XLY surged above its May-June highs last Thursday and then consolidated with four small candlesticks. While todays breakout is short-term bullish, the ETF remains overbought as CCI holds above 100. I showed this chart last week as CCI became overbought. The blue dotted line (60) marks CCI support during the prior advance (mid March to early May). Watch this level to signal weakness in momentum that could lead to an extended pullback. In addition, watch the consolidation lows. As long as XLY holds above 24.5, the bulls still have a clear edge. Of note, the consumer discretionary sector includes retailers, restaurants, homebuilders, cable providers and auto parts.
Chart 6
RETAILERS LEAD CONSUMER DISCRETIONARY SECTOR... Retail stocks feature prominently in the consumer discretionary sector. Chart 7 shows the Retail HOLDRS (RTH) breaking above its May-June highs. RTH formed a little pennant-like consolidation in the lows 80s and then broke out with a gap today. Technically, this pennant breakout is bullish as long as it holds, but the ETF is way overbought after a 13% advance the last 3-4 weeks. Chart 8 shows the Retail SPDR (XRT) breaking above its May-June highs last week and broken resistance holding. As with RTH, new highs affirm the current uptrend, but the ETF is overbought after a 19% advance in the last 3-4 weeks.
Chart 7
Chart 8
FINANCE SECTOR STRENGTHENS... Continued strength in the Financials SPDR (XLF) is also helping the market, especially the broader market indices like the S&P 500 and the Russell 2000. Chart 9 shows XLF breaking wedge resistance in mid July, consolidating with a falling flag and then breaking flag resistance last week. After holding the breakout a few days, the ETF surged towards its May highs on Thursday. Within the finance sector, chart 10 shows Morgan Stanley (MS) surging above 28 to keep its channel breakout alive. Since this breakout, the stock has been stuck in a trading range the last few weeks. Watch the boundaries for the next directional signal. A break above 29 would be bullish, while a break below 26.5 would be bearish. Chart 11 shows Charles Schwab (SCHW) with a long wedge over the last three months. The stock established support around 16-17 with at least three bounces in the last three months. Todays bounce marks another assault on trendline resistance and a breakout would reverse the three month slide.
Chart 9
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Chart 11
REGIONAL BANKS JOIN THE PARTY... Perhaps the most impressive run over the last seven days is the 17% advance in the Regional Bank SPDR (KRE). Chart 11 shows KRE with a clear break above wedge resistance and the mid July high. Even though the ETF is already overbought, it may follow the Homebuilders SPDR (XHB) lead by making up for lost time. Chart 12 shows XHB breaking wedge resistance and surging to its May highs. Both regional banks and homebuilders were showing relative weakness in early July. With breakouts over the last few weeks, these two important groups are now showing some relative strength that is good for the market overall.
Chart 12
Chart 13
