SPY CONTINUES TO BATTLE ITS FEBRUARY LOW -- FINANCE SECTOR FIRMS WITH HARAMI NEAR FEBRUARY LOW -- CONSUMER STAPLES OUTPERFORMING CONSUMER DISCRETIONARY -- XLY HOLDS ABOVE FEBRUARY LOW AS XLP TESTS IT
SPY CONTINUES TO BATTLE ITS FEBRUARY LOW... John Murphy is off Tuesday-Thursday and will return next week. After two sharp declines, stocks managed to firm on Tuesday with the Dow and S&P 500 gaining over 1%. Chart 1 shows the S&P 500 ETF (SPY) firming with a harami over the last two days. The trend since late April remains down, but SPY is still battling support from the February lows. In fact, the February lows and late May lows combine for a support zone in the 104-106 area. After a gap down and two long red candlesticks, the ETF formed a white candlestick that is nestled inside the red candlestick. Note that the white candlestick body (open-close) fits inside the red candlestick body (open-close). This defines the harami, which is a short-term reversal patterns that requires confirmation with further upside. Namely, we need to see a strong surge off support with good volume and breadth. As far as the downtrend is concern, SPY needs to clear the late May and early June highs to complete a reversal. DIA is also testing its February lows. QQQQ and IWM are still above their February lows.
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Chart 1
The indicator shows 14-period RSI with a small bullish divergence. I lengthened the window by setting the height to .8 by using the advanced indicator options. This shows the smaller zigs and zags a little better. As in early February, RSI has a small bullish divergence working over the last few weeks. RSI touched 30 in late May (oversold) and held above its late May low this month. A higher low in RSI and a lower low in SPY make for a bullish divergence. Even though not all bullish divergences work, the higher low in RSI shows less downside momentum. As with the harami, confirmation is required with further strength. Namely, RSI needs to break above 50 to turn momentum bullish on this daily chart.
FINANCE SECTOR FIRMS WITH HARAMI NEAR FEBRUARY LOW... Weakness in the Financials SPDR (XLF) is a big reason for the current market malaise. XLF peaked ahead of the general market peak and declined around 17% from its April high. While the nine week downtrend remains intact, the ETF showed some signs of firmness with a harami on Tuesday. In addition, XLF was the second best performing sector with a 2+ percent gain on Tuesday. Chart 2 shows the harami pattern forming in the vicinity of the two long white candlesticks in late May. XLF is also trading just above its February low. Obviously, this is a very important test for the finance sector. Failure to hold and a break below the February lows would have long-term implications. The harami is a start, but more is needed to actually reverse this downtrend. In particular, a break above resistance at 15. The indicator window shows XLF relative to the S&P 500. XLF started underperforming in April and continues to underperform. The price relative also needs to break the late May high to put finance back in relative strength mode.
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Chart 2
CONSUMER STAPLES OUTPERFORMING CONSUMER DISCRETIONARY ... The market remains on the defensive as the Consumer Staples SPDR (XLP) outperforms the Consumer Discretionary SPDR (XLY). As noted on Tuesday, we can measure relative strength two ways. First, chartists can use a Perfchart to compare the performance of two or more securities. Second, chartists can use a price relative to compare the performance of one security against another. Perfchart 3 shows XLY and XLP relative to the S&P 500. Click the small colored boxes to add or remove a sector from the perfchart. Click the S&P 500 tab to show relative performance (shaded) or absolute performance (white). Both are down over the last 31 days, but XLY is down more than XLP. This means that consumer staples are holding up better and showing relative strength. Despite relative strength, consumer staples and the other sectors are still down since the last week of April. Notice that healthcare, utilities and consumer staples are down less than the S&P 500. Money managers that use the S&P 500 as a benchmark are likely moving into these defensive sectors to ride out the storm.
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Chart 3
Perfchart 4 shows absolute performance for all nine sectors and the S&P 500 since April 23rd. Notice that all boxes are filled and all tabs are white. Click on any tab to make that security the benchmark. All sectors are down, but the three defensive sectors are down the least, which translates into relative strength. Defensive sectors hold up best when the risk off trade is on.
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Chart 4
XLY HOLDS ABOVE FEBRUARY LOW AS XLP TESTS IT... Chart 5 shows the Consumer Discretionary SPDR in black and the Consumer Staples SPDR (XLP) in red. Based on these price charts, the Consumer Discretionary SPDR is actually holding up better because it remains above its February low. The Consumer Staples SPDR, on the other hand, is testing its February low with dips below 29 in late May and early June. Despite holding above its February low, XLY is down more in percentage terms. From the April high to the June low, XLY fell from 36 to 31 (~13.8%) and XLP fell from 28.2 to 25.8 (~8.5%). Also notice the downtrend in the price relative (XLY:XLP ratio). The price relative peaked in late April and moved lower the last five months. A break above 1.25 is needed to reverse this downtrend in relative performance and put the consumer discretionary back on the offensive.
