SMALL-CAPS LEAD BROAD RALLY - JP MORGAN POWERS THE FINANCE SECTOR - XLF BREAKS SEPTEMBER HIGH - JPM-BAC-WFC-USB LEAD FINANCE SECTOR - INTEL LIFTS THE SEMIS - SMH BREAKS RESISTANCE - RISK-ON TRADE REMAINS AS DOW HITS 10K AND DOLLAR HITS NEW LOW
SMALL-CAPS LEAD BROAD RALLY... Video Link (click here) The Russell 2000 and the NY Composite led the major indices on Wednesday. All of the major indices were up on the day, but the Russell 2000 and NY Composite were the only two to gain 2%. Chalk it up to the financials and small-caps. Financials make up the biggest percentage of both indices. Chart 1 shows the NY Composite ($NYA) moving above its September high with a close above 7100 today. Volume has been below the 200-day moving average in October, but the gains are coming nonetheless. Price action is more important than volume. Chart 2 shows the Russell 2000 challenging its September highs with a move above 620 today. This level may indeed offer resistance and MACD (5,35,9) may have a bearish divergence working, but there are no signs of weakness yet. At the very least, MACD (5,35,9) needs to move below its signal line before even considering a peak near 620-625.
Chart 1
Chart 2
JP MORGAN STOKES FINANCE SECTOR... A bullish reaction to earnings from JP Morgan powered the finance sector higher on Wednesday. Chart 3 shows the Financials SPDR (XLF) moving above its September highs. Since the July surge, the bulls have not let up as the ETF forged a series of higher highs and higher lows over the last 2 1/2 months. With todays move, XLF forged yet another higher high to affirm the uptrend. After surging over 10% the last nine days, the ETF is short-term overbought and ripe for a pullback or some sort of consolidation. The support zone around 13.5-14 holds the key to this medium-term uptrend.
Chart 3
Chart 4 shows JP Morgan (JPM) leading the charge with a move above its September highs. JPM accounts for 12.41% of XLF, which makes it the largest component. Like XLF, the August-October lows mark a medium-term support zone for JPM (around 40-41). The stock gapped up today, but some selling pressure emerged after the open and the stock traded flat. Nevertheless, this gap is bullish as long as it holds. A move back below 45 would be needed before considering this an exhaustion gap.
Chart 4
Elsewhere in the Financials SPDR, chart 5 shows US Bancorp (USB) breaking triangle resistance and exceeding its August high. Chart 6 shows Wells Fargo (WFC) surging off support in October and breaking its September high this week. Chart 7 shows Bank of America (BAC) breaking above its August high. Notice that BAC broke support at 16.5 in early October, but quickly recovered with a bounce back above 17 three days later. This failed support break was a bear trap. Using the HSI (hindsight indicator), support at 16.5 was too tight. In reality, there was a support zone around 15.5-16 from the August-September lows. This zone jibed with XLF and ultimately held.
Chart 5
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INTEL LIFTS SEMIS... A bullish reaction to earnings also lifted Intel (INTC) and the Semiconductors HOLDRS (SMH) on Wednesday. Chart 8 shows INTC exceeding its prior highs with a gap up today. The stock encountered selling pressure after the gap, but managed to close above the prior close. This is why the candlestick is black and filled. It is black because the close is above the prior close. It is filled because the close is below the open. Sellers appeared after the open and pushed prices below 21. Nevertheless, Intel is up nine days straight with strong volume coming the last two days. Even though the stock isshort-term overbought, the medium-term trend is clearly up with todays higher high. Broken resistance in the low 20s turns into the first support zone (orange area).
Chart 8
Chart 9 shows the Semiconductors HOLDRS exceeding its September highs today. As with Intel, SMH opened strong with a gap, but selling pressure pushed prices down after the open. Nevertheless, SMH remains in positive territory for the day with a gain in excess of 1%. The pattern over the last eight weeks looks like an ascending triangle, which is a bullish continuation pattern. Todays breakout should be considered bullish until there is evidence to the contrary. A move below 26 would call for a re-evaluation.
Chart 9
RISK-ON TRADE CONTINUES... As John Murphy noted on Tuesday, the Dollar carry trade is still going as traders sell Dollars to invest the proceeds in higher yielding assets. This has also been called the risk on trade. As long as the appetite for risk remains on, the Dollar is likely to suffer. With todays bullish reaction to JP Morgan, the Dow Industrials moved to a new high for the year and the US Dollar Index ($USD) moved to a new low. Chart 10 shows the Dow exceeding its September high and hitting 10,000 today. After the initial surge in July, the Dow zigzagged higher over the last 2 1/2 months. The last reaction low formed around 9400 and this level marks uptrend support. The bottom indicator window shows the Aroon Oscillator. It turned negative last week, but flipped back into positive territory for a whipsaw this week.
Chart 10
Chart 11 shows the Dollar Bullish ETF (UUP) moving further south today. It is a relentless downtrend, but there are simply no signs of strength. After trying to firm with a bounce on Friday, the ETF moved lower the last three days. The bottom indicator window shows RSI failing at 50-55 again in early October. This area marks momentum resistance for the downtrend. Even though RSI is currently above its September low for a potential bullish divergence, we need to see a breakout at 55 to actually reverse the downtrend in momentum.
Chart 11
