UPSIDE MOMENTUM WANES FOR SPY - SIGNS OF SELLING PRESSURE ON INTRADAY CHARTS - MCCLELLAN OSCILLATORS SHOW BREADTH DETERIORATION - GOLD SURGES ABOVE TRIANGLE RESISTANCE - GOLD STOCKS OUTPACE GOLD - DOLLAR REMAINS IN DOWNTREND
STOCKS STALL AFTER SHARP DECLINES... Link for todays video. After sharp declines on Monday and Tuesday, the S&P 500 ETF (SPY)* stalled just below 100 on Wednesday. Chart 1 shows the ETF closing in the red for its fourth consecutive losing day. SPY has not seen four down days in a row since early July. Currently, SPY remains above its mid August low and in an uptrend. However, upside momentum is waning as RSI formed a negative divergence over the last five weeks and finished just below 50 on Wednesday. A negative divergence forms when the security hits a higher high, but the momentum oscillator forms a lower high. Furthermore, with RSI moving below its mid August low, a bearish failure swing materialized today. The last such bearish failure swing foreshadowed the correction from mid June to early July. According to Wells Wilder, a bearish failure swing occurs when the following conditions are met. First, RSI exceeds 70 and then declines. Second, RSI bounces and fails to exceed its prior high. Third, RSI declines and breaks below its prior low.
Chart 1
BULLS LOOSING THEIR MOJO... There are also signs of increased selling pressure on the intraday charts. Chart 2 shows 15-minute bars for SPY. The ETF failed to hold opening gaps on August 25th and August 28th as each gap was quickly filled. The ETF then gapped down on August 31st and stalled at support around 102. Perhaps most significant, SPY surged above 103 in the first hour on September 1st, but failed to hold this surge and declined sharply. SPY stalled on September 2nd and has yet to recover from Tuesdays decline. Broken support around 102 now turns into the first resistance level to watch.
Chart 2
MCCLELLAN OSCILLATORS PLUNGE... The McClellan Oscillators paint a picture of deteriorating breadth. These oscillators show the 19-day EMA of Net Advances less the 39-day EMA of Net Advances. It is kind of like a MACD of Net Advances. As an oscillator, we can look for positive/negative divergences, up/down thrusts and centerline crossovers. Most recently, the McClellan Oscillators for the Nasdaq and NYSE forged negative divergence, down thrusts and centerline crossovers. These bearish developments for breadth could ultimately weigh on the stock market. Lets look at the McClellan Oscillator for the NYSE in detail (Chart 3). First, the indicator formed a lower high as the NY Composite forged a higher high in late August (red arrow). This is the negative divergence. Second, the indicator plunged below -50 in late August and early September. These are the down thrusts. Third, the indicator crossed below its centerline (zero). I view these developments as bearish until the McClellan Oscillator surges back above +50 (blue dotted line). Chart 4 shows McClellan Oscillator for the Nasdaq with similar characteristics.
Chart 3
Chart 4
GOLD SURGES... The Gold ETF (GLD) surged above 95 with a big move on Wednesday. John Murphy noted that gold looked promising on Friday and bullion obliged with a big move. Chart 5 shows the Gold ETF breaking triangle resistance with a long white candlestick. Also notice that GLD broke above its early August high. After contracting within the triangle, todays move is decisively bullish and opens the door to a bigger resistance challenge around 97-100.
Chart 5
Chart 6 shows weekly bars with a large inverse head-and-shoulders pattern taking shape. There is a ton of resistance around 97-100 going all the way back to March 2008. A move above 100 would break this major resistance zone and target a move to 130. The height of the pattern is added to the breakout for an upside target. With todays triangle breakout, the odds of a head-and-shoulders breakout improved significantly. A close below 90 would call for a reassessment.
Chart 6
EDUCATION NOTE... The head-and-shoulders pattern is usually associated with tops as a reversal pattern. However, an inverse head-and-shoulders can also work as a bullish continuation pattern - after an advance. GLD advanced from the low 40s in early 2005 to around 100 in 2008. The inverse head-and-shoulders pattern represents a consolidation after this large advance. A break above resistance would signal a continuation of the prior advance.
GOLD STOCKS FOLLOW BULLION... The Gold Miners ETF (GDX) took its cue from gold with a huge advance on Wednesday. In percentage terms, GDX was up over three times more than gold. Chart 7 shows GDX establishing support around 37 in late July and mid August. Todays surge reinforces support to keep the uptrend alive. Also notice that the 200-day moving average is rising and the 50-day moving average is comfortably above the 200-day.
Chart 7
Chart 8 shows Newmont Mining (NEM) breaking above its late July highs with a big move on Wednesday. NEM bounced off support in the 35-39 region the last eight months and todays breakout looks promising. Notice that RSI broke to its highest level since early June.
Chart 8
Chart 9 shows Barrick Gold (ABX) breaking above triangle resistance with a surge above 37. This is the second up day on big volume for Barrick.
Chart 9
DOLLAR REMAINS WEAK... Continued weakness in the greenback helped gold on Wednesday. Chart 10 shows the Dollar Bullish ETF (UUP) surging on Tuesday, but falling back on Wednesday. Even though there is evidence of slowing downside momentum, the Dollar remains short of an actual breakout that would signal a trend reversal. Based on the 50-day moving average, late July high and March trendline, I am marking resistance at 23.75. A break above this level is needed to consider a trend reversal. RSI formed a higher low in early August for a positive divergence. However, this key momentum indicator cannot break above resistance in the 50-55 area. Momentum has yet to turn the corner until such a breakout.
Chart 10
