QQQQ SHRUGS OFF BEARISH ENGULFING - SEMIS LEAD TECHS - AMAT BREAKS TRIANGLE RESISTANCE - LRCX SURGES ON GOOD VOLUME - XLY HITS CHANNEL RESISTANCE - RETAIL ETF CONTINUES TO LEAD - VIX HITS COMPLACENCY LOW FROM MAY 2008
QQQQ SHRUGS OFF BEARISH ENGULFING PATTERN ... Link for todays video. Many of the major index ETFs formed bearish engulfing patterns on Friday, but these were not confirmed with further weakness on Monday. A bearish engulfing pattern forms when the open is above the prior close and the close is below the prior open. It is similar to an outside reversal. These patterns represent a change of heart during the day. Even though the bulls started in control with a strong open, the bears took control and pushed prices lower by the close. According to candlestick theory, bearish engulfing patterns require confirmation with further weakness. The Nasdaq 100 ETF (QQQQ) and S&P 500 ETF (SPY) both formed bearish engulfing patterns Friday. Both opened weak on Monday and it looked as if we might see confirmation. The bulls had other ideas almost immediately as buyers stepped in right after the open and pushed stocks higher. Chart 1 shows QQQQ moving above last weeks high. Chart 2 shows SPY surging back towards Fridays high. Both are short-term overbought with RSI trading above 70. Todays low now marks the first short-term support level to watch.
Chart 1
Chart 2
SEMIS LEAD TECHS HIGHER... Semis stood out on Monday as the Semiconductors HOLDRS (SMH) surged almost 2%. Chart 3 shows SMH recouping Fridays decline and then some. SMH opened weak, but bottomed in the first hour and moved higher throughout the day. Todays long white candlestick establishes the first support level to watch. Support at 27.29 is affirmed by the trendline extending up from the February low. The bottom indicator window shows SMH with QQQQ. SMH is lagging QQQQ this year because it remains below its January high. However, SMH bottomed along with QQQQ in early February and has been moving steadily higher the last 6-7 weeks. Techs are in good shape as long as SMH continues moving higher and holds last weeks low. Chart 4 shows weekly candlesticks for SMH over the last 18 months. SMH remains in a clear rising price channel with the February low marking long-term support at 24.
Chart 3
Chart 4
AMAT BREAKS TRIANGLE - LRCX SURGES... Within the semiconductor group, chart 5 shows Applied Materials (AMAT) breaking triangle resistance with pretty good volume over the last few days. The triangle shows indecision with the trading range. The subsequent break marks a decision with support based on the mid March low. Chart 6 shows Lam Research (LRCX) firming after last weeks gap and holding support. The stock surged on big volume today and a break above 36 would be bullish.
Chart 5
Chart 6
XLY HITS CHANNEL RESISTANCE ... The Consumer Discretionary SPDR (XLY) remains on a tear with a 1.05% gain on Monday. Chart 7 shows XLY with a rising price channel over the last eight months. The channel took shape by November with the December high hitting channel resistance and the February low bouncing off channel support. With a 14.73% gain the last 29 days, XLY is once again hitting channel resistance. The trend is clearly up as price action moves from the lower left to the upper right. However, the ETF is also overbought after this six week run and RSI has been above 70 for two weeks. Channel resistance and overbought conditions increase the chances of a pullback or consolidation in the coming weeks.
Chart 7
STRENGTH IN RETAIL BODES WELL FOR CONSUMER SPENDING... Strength in retail continues to propel the consumer discretionary sector. Chart 8 shows the Retail SPDR (XRT) with a very sharp advance the last six weeks. XRT is up almost 20% in the last 29 trading days. Even with a weak open today, the bulls could not be denied as the ETF surged over 2%. The advance is clearly overextended and RSI is overbought, but there are no signs of weakness yet. It is a classic case of becoming overbought and remaining overbought.
Chart 8
Despite short-term overbought conditions, the overall trend for XRT is up and this bodes well for retail spending, which drives some 2/3 of GDP. XRT is a broad-based ETF with over 60 components. Moreover, the top component (HSN Inc) weighs just 2.29% and the bottom component (Dress Barn) weighs 1.52%. The weightings are spread out and not concentrated in just a few stocks. This makes XRT truly representative of the retail industry group.
M HITS NEW HIGH - WAG SURGES... Within the retail group, chart 9 shows Macys (M) surging over 5% and hitting a new 52-week high. Notice that RSI became overbought on February 18th and remained overbought for over three weeks. This is another classic case of being both overbought and strong. Chart 10 shows Walgreen (WAG) finding support near the 62% retracement in February and forging a higher low in March. The stock moved above 35 on above average volume today.
Chart 9
Chart 10
VIX HITS COMPLACENCY LOW FROM MAY 2008... It is hard to say which VIX level represents complacency, but the current VIX level corresponds with the S&P 500 highs in October 2007 and May 2008. Oct-07 marked the bull market high. May-08 marked the reaction high after the first bear market bounce. With a sharp decline the last eight weeks, chart 11 shows the S&P 500 Volatility Index ($VIX) moving to its lowest levels since these two S&P 500 highs. The red dotted line marks the 16 level for the VIX. While current conditions are certainly different now, it is clear that VIX levels in Oct-07 and May-08 indicated complacency. With the market overbought and VIX back near prior complacency levels, it may be time for some caution going forward. Chart 12 shows the Nasdaq 100 Volatility Index ($VXN) for reference.
Chart 11
Chart 12
