SMALL CAPS HOLDING UP BETTER THAN LARGE CAPS -- INTERMARKET DYNAMICS SHOW INVERSE STOCK BOND RELATIONSHIP -- GOLD FORMS WEEKLY BEARISH ENGULFING -- OIL FINDS SUPPORT AROUND 70 AGAIN -- BONDS HIT LONG TERM RESISTANCE ZONE
SMALL-CAPS HOLDING UP BETTER THAN LARGE-CAPS ... Link for todays video. While the S&P 500 ETF (SPY) tested its February low this month, the Russell 2000 ETF (IWM) held well above its February low. Chart 1 shows SPY dipping below 106 three times this month and recovering each time. These recoveries affirm support in the 105 area. A close below the February-May lows would break support and argue for a trend reversal. RSI is also testing uptrend support in the 40-50 zone. Notice how the indicator ranged from 40 to 80 during the uptrend from May 2009 to the present. A break below 40 would break this range for the first time since March 2009 and be bearish for momentum.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) finding support near the July trendline and the May lows. So far, a series of higher highs and higher lows remains in place for this small-cap ETF. In addition, a falling wedge is taking shape with resistance just above 70 (last weeks high). A breakout here would signal a continuation of the current uptrend. RSI is also holding uptrend support in the 40-50 zone. A break below this support zone would turn momentum bearish.
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Chart 2
INTERMARKET DYNAMICS SHOW INVERSE STOCK-BOND RELATIONSHIP... Perfchart 3 shows five intermarket ETFs over the last 30 days. Oil and stocks are down sharply from mid April to late May. Bonds, the Dollar and Gold are up during this period. Oil got hit by the double whammy of falling stock prices and a rising Dollar. Weakness in stocks could foreshadow weakness in the economy and this would decrease demand for oil. Bonds benefitted from a flight to safety as the Euro and stock market fell sharply. Gold benefitted as a currency alternative and possible future inflation hedge.
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Chart 3
These inverse relationships remained in place this week, but the individual movements reversed. Oil and bonds moved first. The black line shows bonds starting to move lower and oil starting to move higher at the beginning of the week. Stocks shot higher a few days later and the Dollar moved lower. Strength in the Euro and European equities prompted more risk taking. Money moved out of bonds (safety) and into the stock market (risk). This is a relationship worth watching in the coming days and weeks. In an interesting twist, gold held up this week and was not affected by strength in the Euro. Gold seems to have a mind of its own these days.
GOLD FORMS WEEKLY BEARISH ENGULFING... Even though the Euro surged and the Dollar fell this week, gold held its ground with a small gain on Thursday. Chart 4 shows weekly candlesticks for the Gold ETF (GLD). The overall trend remains up, but some potentially bearish candlestick patterns appeared over the last two weeks. First, GLD opened strong and closed weak last week to form a bearish engulfing. Second, the ETF traded within the range of last weeks candlestick this week. Should GLD close between 119 and 116, a harami will form. These are also bearish candlestick reversal patterns that require confirmation. The bigger uptrend is not in jeopardy here, but further strength in the Euro and stock market could weigh on gold.
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Chart 4
Chart 5 shows daily candlesticks with the ETF hitting potential retracement resistance. Again, the overall trend here remains up. GLD broke a big resistance zone around 111-114 in late April and this zone becomes support. GLD fell sharply in mid May, but bounced over the last four days. The Fibonacci Retracements Tool shows this bounce retracing 50-62% of the mid May decline. This area could act as short-term resistance. A short-term reversal from current levels would target a move towards the support zone and the February trendline (112-114).
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Chart 5
OIL FINDS SUPPORT AROUND 70 AGAIN... Oil has been a tough trade since June 2009. Chart 6 shows West Texas Intermediate ($WTIC) moving above 70 in June 2009 and trading on either side of this level the last 11 months. Trading since October has been mostly above 70. Oil appeared to break 70 this week, but recovered with a strong rebound to ultimately hold support. The yellow area shows a prior resistance zone turning into a current support zone. The trend has not reversed until West Texas Intermediate holds its break below support. It is possible that a broadening formation is taking shape. These patterns show higher highs and lower lows, which shows increasingly volatility. While a higher high shows strength, the lower low shows weakness. Neither the bulls nor the bears have a clear upper hand as confusion reign supreme.
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Chart 6
Chart 7 shows West Texas Intermediate falling from 86 to 68 in four weeks. This 20% decline produced oversold conditions to set up the current bounce. Was this an oversold bounce or a bear trap? The quick recovery back above the support break looks like a bear trap. The Fibonacci Retracements Tool shows the next potential resistance zone in the 78 area.
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Chart 7
BONDS HIT LONG-TERM RESISTANCE ZONE... Chart 8 shows the 20+ Year Treasury ETF (TLT) breaking out with a big move four weeks ago as money moved to relative safety. The advance from 90 to 100 was certainly strong, but it pales relative to the 2008 panic when TLT surged from 90 to 115 in five weeks (November-December 2008). The current flight to safety is not as extreme, but there was clearly a flight to safety in May as the Euro and stock market fell sharply. On the price chart, TLT has resistance around 97.5-102.5 from the February-March consolidation and the October 2009 high. A break above 100 would signal another flight to safety that would most likely coincide with a big breakdown in the stock market.
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Chart 8
Chart 9 shows TLT hitting resistance at 100 and reversing course this week. The reversal over the last seven days looks the opposite of the stock market reversal. Chart 10 shows SPY forming two long white candlesticks as it opened weak and close strong twice. These were followed by an upside breakout on Thursday. TLT formed two black candlesticks as it opened strong and close weak twice. The move below 97.5 broke short-term support and forged a short-term reversal. Should the stock market reversal hold and continue, TLT is likely to retrace a greater portion of the April-May advance. The Fibonacci Retracements Tool shows the 50% retracement around 93.50.
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Chart 9
