SMALL-CAPS LEAD LATE SELL-OFF - SPY BREAKS SHORT-TERM SUPPORT - FINANCE LEADS SECTORS LOWER - REGIONAL BANKS SHOW RELATIVE WEAKNESS - OCTOBER HAS BEEN GOOD FOR COMMODITIES - AGRICULTURE AND BASE METALS ETFS BREAK RESISTANCE - DOLLAR HITS ANOTHER NEW LOW
STOCKS FAIL HOLD GAINS... Video Link (click here) Stocks opened strong with positive reactions to earnings from Morgan Stanley, US Bancorp and Yahoo!. However, these gains proved fleeting as selling pressure hit hard in the final hour of trading. Small-caps led the way lower with the Russell 2000 ETF (IWM) loosing over 1% on the day. Chart 1 shows IWM hitting resistance last week, stalling for four days and then falling over the last two days. Top pickers are licking their chops right now, but trend followers are waiting for a support break to fully reverse the uptrend. The medium-term trend remains up with support around 57-58 from the October low. Should resistance around 62 hold, a support break would trigger a double top reversal.
Chart 1
In the indicator window, another bearish divergence is taking shape in RSI. The first occurred in August, but did not lead to a significant decline. After becoming overbought in mid September, RSI dipped below 50 in early October and then formed a lower high last week. With IWM forming a higher closing high in October, a bearish divergence is brewing for RSI. The 40-50 zone marked support in August, September and early October. RSI is once again testing this area with a move to 50 today.
SPY BREAKS SHORT-TERM SUPPORT... Chart 2 shows 30-minute bars for the S&P 500 ETF (SPY) over the last three weeks. Since the October 2nd low, SPY had been working its way up with higher highs and higher lows. In addition, there were a number of gaps along the way. The ETF hit resistance around 110 twice this week and broke below its intermittent low with a sharp decline today. Notice that this decline occurred in the final hour (last two bars). With a lower low taking shape, the short-term uptrend in SPY has been reversed.
Chart 2
CCI also plunged below -100 to confirm the support break in SPY. Prior plunges below -100 were not accompanied (confirmed) with a support break in SPY. Normally, CCI is considered overbought above +100 and oversold below -100. However, the ability to surge above +100 shows momentum strength, not weakness. Conversely, the ability to plunge below -100 shows momentum weakness, not strength.
FINANCIALS LEAD LOWER... The Financials SPDR (XLF) led the sectors lower on Wednesday. Chart 3 shows the ETF gapping up last week, holding the gap for two days and then gapping down. An island reversal formed with these two gaps and the stock continued lower this week. Even though the short-term is looking bearish, there is a lot of support around 13.5-14 and the medium-term uptrend remains as long as this support zone holds.
Chart 3
Even though XLF remains in a medium-term uptrend, relative weakness in the Regional Bank SPDR (KRE) is a big concern. Chart 4 shows KRE breaking channel resistance in early October, but failing to hold this breakout with a high-volume plunge below 21 today. Even though a bigger triangle is still in play with support near current levels, pervasive relative weakness increases the chances of a support break. The indicator window shows SPY in red and KRE in blue. Notice that SPY forged higher highs in September and again in October, but the Regional Bank SPDR forged lower highs over this same timeframe. KRE is clearly not keeping pace and this shows relative weakness.
Chart 4
COMMODITIES CONTINUE STRONG... October has been one bullish month for commodities. In fact, John Murphy and I have written about one or another commodity group no fewer than nine times this month. Natural gas, oil, gold, industrial metals and agriculture have been covered. The DB Commodity Index Tracking ETF (DBC) represents a basket of commodities including light crude (38.14%), heating oil (17.36%), gold (14.06%), Aluminum (11.09%), wheat (9.68%) and corn (9.66%). As you can see, oil related commodities represent over 50% of this ETF. Unsurprisingly, the DB Commodity Index Tracking ETF has followed oil higher over the last few weeks. Chart 5 shows DBC breaking triangle resistance last week and exceeding its summer highs today. After a 14% surge in three weeks, the ETF is already short-term overbought and ripe for a pullback or consolidation.
Chart 5
Chart 6
AGRICULTURE EXTENDS AFTER BREAKOUT... Last Thursday I featured the DB Agriculture ETF (DBA) with a break above triangle resistance. Until this breakout, agricultural commodities were not following oil and gold higher. This may be changing. Bloomberg reported today that wheat moved to a 10-week high based on export demand. A weak Dollar makes US wheat more competitive on the international market. Chart 7 shows DBA break resistance last week and moving above its August high today. The next resistance zone resides around the summer highs.
Chart 7
INDUSTRIAL METALS ETF BREAKS RESISTANCE... Not to be outdone or left behind, chart 8 shows the DB Base Metals ETF (DBB) breaking above ascending triangle resistance with a surge above 20 over the last three days. These are bullish continuation patterns. This weeks breakout affirms the current uptrend and reinforces support around 17.
Chart 8
DOLLAR REMAINS THE CULPRIT... Weakness in the Dollar continues to boost commodities. In addition, the stock market rally from March to October bodes well for the economy and commodity demand. Chart 9 shows the DB Dollar Bullish ETF (UUP) moving to yet another new reaction low. The greenback has been trending lower since March, which is when the stock market bottomed. Also notice that the Dollar has been moving lower as long as short-term rates move lower. The indicator window shows the 1-Year Treasury Yield ($UST1Y) firming in early October and edging higher the last two weeks (yellow area). This is not yet enough to stem the slide in the Dollar. However, a break above the late September highs would signal an upturn in short-term rates that could spark a rally in the Dollar. Keep an eye on this over the coming days.
Chart 9
Chart 10
