MAJOR INDEX ETFS FAIL NEAR BROKEN SUPPORT -- KEY SECTORS ALSO FAIL NEAR BROKEN SUPPORT -- A CASE FOR EURO DOLLAR PARITY -- EUROSTOXX ETF BACKS OFF BROKEN SUPPORT -- GERMAN DAX HOLDS EUROPE AFLOAT AS FRENCH CAC BREAKS SUPPORT
MAJOR INDEX ETFS FAIL NEAR BROKEN SUPPORT... Link for todays video. Stocks were down sharply in early trading on Friday. The Nasdaq 100 ETF (QQQQ), S&P 500 ETF (SPY), Dow SPDR (DIA), Russell 2000 ETF (IWM) and S&P 400 MidCap ETF (MDY) were all down over 2%. On the price charts, all five hit resistance from broken support and some moved into Mondays gap zone. Chart XX shows QQQQ meeting resistance from broken support around 49. The ETF gapped down today and moved below 47 quite quickly. While there is still support in the 45.5-46.5 area from last weeks low, we now have an important resistance level around 49. Chart 2 shows IWM with a similar setup. Broken support around 72 turned into resistance as the ETF gapped down today. IWM has yet to enter Mondays gap zone. In this regard, IWM is holding up better than QQQQ. Todays move is obviously short-term bearish, but last weeks lows have yet to be tested. These closing lows hold the key to the bigger uptrend.
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Chart 1
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Chart 2
KEY SECTORS ALSO FAIL NEAR BROKEN SUPPORT... The four key offensive sectors show patterns similar to those seen in the major index ETFs. I consider the consumer discretionary, finance, industrials and technology sectors as the offensive sectors. These four represent key areas of the economy and important areas of the stock market. Consumer discretionary represents retail and discretionary spending (the consumer). Finance is the second biggest sector in the S&P 500 and represents the banks. Industrials represent the backbone of the economy. Technology is the largest sector in the S&P 500 and represents the appetite for risk. The market performs well when these sectors perform well. Chart 3 shows the Consumer Discretionary SPDR (XLY) hitting resistance from broken support around 34.5. Despite a strong retail sales report today, the ETF moved sharply lower and entered its gap zone. Chart 4 shows the Financials SPDR (XLF) gapping down and moving to the lower end of Mondays gap zone. Some big banking stocks are feeling the heat from the NY Attorney General. Chart 5 shows the Industrials SPDR (XLI) hitting resistance from broken support around 32.5 and moving into the gap zone today. Chart 6 shows the Technology SPDR (XLK) falling short of broken support and forming a harami on Thursday. The ETF gapped down on Friday and moved into the gap zone with a sharp decline. Techs are taking a beating.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
A CASE FOR EURO-DOLLAR PARITY... The world economy can be divided into seven regions: North America, Asia, Latin America, the Middle East, Europe and the Former Soviet Union. Some analyst split the Former Soviet Union between Europe and Asia. North America, Europe and Asia are by far the three biggest economic regions. In fact, these three account for over 60% of world GDP. With Europe representing one leg of this three legged stool, it is little wonder that problems in Europe are spreading throughout the world. Despite the comprehensive solution put forth in Europe last weekend, the Euro fell below last weeks low today and European stock markets are down sharply today. This is hardly a vote of confidence. Pervasive weakness is causing another flight to safety as money moves into gold and US Treasuries. Chart 7 shows the Euro ETF (FXE) testing its 2008 lows with a move below 125 today. Based on the long-term downtrend on this chart, I do not expect support in this area to hold. FXE formed a lower high and it is possible that a large falling price channel is taking shape. A parallel trendline from the October 2008 low extends to 100 at the end of this year. That is parity. Chart 8 shows gold and treasuring bonds surging as the Euro plunges. Gold is approaching the 1000 Euro mark.
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Chart 7
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Chart 8
EUROSTOXX ETF BACKS OFF BROKEN SUPPORT... Stock indices representing Portugal, Italy, Greece and Spain have already broken down and could ultimately drag down the main European indices. First, lets review the Euro Stoxx 50 SPDR (FEZ). This ETF includes 50 stocks from 12 Euro-zone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. 16 of the 50 components (32%) come from the finance sector. Debt, and by extension banks, is at the heart of the problem in Europe. Therefore, the heavy weighting in finance should serve as good a proxy on European financial conditions. Chart 9 shows FEZ meeting resistance near broken support and falling sharply over the last two days. The ETF opened above 35 on Monday, but stalled the entire day and finished with a doji. With another decline today, the ETF is down three of the last five days. There was no follow through to Mondays gap. Overall, the trend is down on this chart. FEZ broke support in January, formed a lower high in April and plunged to new lows in May. This argues for a move below last weeks low.
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Chart 9
GERMAN DAX HOLDS EUROPE AFLOAT AS FRENCH CAC WEIGHS... Unsurprisingly, the German DAX ($DAX) is one of the strongest indices on the continent. Chart 10 shows the DAX recording a new 52-week high in April and then plunging with the rest of the world in May. Despite a coordinated plunge, the DAX recovered quite well with a move back above 6200 this week. Overall, the DAX remains in an uptrend with higher highs in January-April and higher lows in February-May. The May low now marks key support. Strength in the DAX could signal a flight to safety as money rotates from the weak countries to the strong countries. This makes sense for fund managers with a requirement to be invested in Europe. The red line shows the DAX closing at 6056 today. Chart 11 shows the French CAC 40 ($CAC) breaking support with the May plunge, but recovering that support break this week. Even so, a lower low formed and the index is in a potential resistance zone around 3700-3800. Notice that a 50-62% retracement of the April-May decline marks resistance in this area. Also notice that the January-April highs could mark a massive double top. The red line shows index closing at 3570 today.
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Chart 10
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Chart 11
A BEARISH BROADENING FORMATION FORM IN THE FTSE... Even though the UK is not part of the EU, they are major trading partners with plenty of financial links. Chart 12 shows the London FTSE ($FTSE) within a large right expanding triangle. The index forged higher highs from November to April, but returned to support in the 5000-5100 range from November to May. Such deep pullbacks after higher highs are not normal, but support is still holding after this weeks bounce. The expanding right triangle is a type of broadening formation, which is generally bearish. In the Encyclopedia of Chart Patterns, Thomas Bulkowski notes that these patterns sometimes produce a partial rise just before the support break. Well, the FTSE bounced above 5400 this week and remains well below its prior high. This could be a partial rise. Bulkowski also notes that there is often a throwback rally after the support break. Classic technical analysis stipulates that broken support turns into resistance. A break below 5000 would confirm the pattern and the 5000-5100 area would turn into resistance. Should support fold, there could be an oversold bounce to this area. The red line shows the index closing at 5262 today.
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Chart 12
WEAKNESS IN CHINA REMAINS A CONCERN... A look at some key Asian indices reveals concerns with China, strength in Japan and a big support test for Australia. Chart 13 shows the Shanghai Composite ($SSEC) breaking triangle support over the last few weeks. Notice that this index peaked way back in July 2009 and lower highs formed ahead of the breakdown. The Shanghai Composite also broke below the 52-week moving average for the first time since March 2009. Chart 14 shows the Nikkei 225 ($NIKK) hitting resistance around 11000. The trend in the Nikkei remains up as a rising channel takes shape. Actually, the Nikkei is showing relative strength, especially compared to China. Chart 15 shows the Australian All Ords Index ($AORD) with an expanding right triangle, similar to the pattern shown in the London FTSE. The 52-week moving average and prior lows mark support around 4500. A break below these levels would reverse the uptrend.
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Chart 13
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Chart 14
