SPY AND DIA GET COLD FEET AT RESISTANCE -- QQQQ FORMS TRIANGLE AS IWM FALLS SHORT -- FINANCE SECTOR LAGS BROADER MARKET -- UTILITY SPDR BREAKS RESISTANCE TO SHOW LEADERSHIP -- EURO GETS AN OVERSOLD BOUNCE WITHIN DOWNTREND
SPY AND DIA GET COLD FEET AT RESISTANCE... Link for todays video. Trading remains tricky as the major index ETFs get cold feet at or below important resistance levels. Stocks opened strong on Monday and continued higher in the morning, but selling pressure took over in the afternoon and the major index ETFs closed well off their intraday highs. Chart 1 shows the Dow SPDR (DIA) surging from 98 to 103 over the last five days. From low to high, the ETF is up over 5% in five days. This is a strong move off support, but resistance is nigh and the ETF is short-term overbought. Resistance around 103 stems from the late May and early June highs. In addition, the blue trendline extends to this area. Notice how DIA opened at 102.99, surged to 103.49 and then gave it back with a close at 102.04. This filled candlestick shows more selling pressure than buying pressure because the close was well below the open on Monday. It will still take a convincing breakout on good volume and breadth to fully reverse the seven week downtrend. It is not always straight up after a breakout. Securities often pullback and/or consolidation after big moves. For example, notice how DIA pulled back with a small falling flag after the February surge and breakout. Should DIA again break resistance, I would also expect some sort of pullback or consolidation at some point after the breakout.
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Chart 1
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Chart 2
Chart 2 shows the S&P 500 ETF (SPY) surging above 111 intraday, but moving lower in the afternoon and closing with a loss. Red candlesticks indicate a lower close. A fill candlestick indicates that the close was below the open. SPY is also getting cold feet near resistance from the late May and early June highs. An uptrend starts with a resistance break and a higher high. So far, SPY has successfully tested support, but remains short of a breakout. RSI is also testing resistance at 50. I pointed out the bullish divergence last week and RSI edged higher the last five days. A break above 50 would push RSI to its highest level since early May.
QQQQ FORMS TRIANGLE AS IWM STALLS BELOW RESISTANCE... In contrast to DIA and SPY, the Nasdaq 100 ETF (QQQQ) and Russell 2000 ETF (IWM) remain below their prior highs and show some relative weakness recently. Even though both held above their February lows, I am concerned with relative weakness in techs and small-caps over the last week. Confirming breakouts in these two are needed to validate a trend reversal in the overall market. Chart 3 shows QQQQ with a potential triangle formation over the last 3-4 weeks. This is a neutral consolidation, but the prior decline gives it a bearish bias. Even though it is a bit early to draw the upper trendline, I am showing it as a potential heads up because of todays weak close. A downturn from here and a triangle break would signal a continuation lower.
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Chart 3
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Chart 4
Chart 4 shows IWM with a falling wedge over the last seven weeks. The ETF formed a lower low last week and has yet to break above resistance around 67. The wedge is still falling. A move above this level is needed to forge a higher high and reverse the downtrend. The price relative shows IWM relative to SPY. This indicator broke down last week as small-caps started showing relative weakness.
FINANCE SECTOR LAGS BROADER MARKET ... The Financials SPDR (XLF) also held its February low and surged over the last five days. However, the ETF remains well short of resistance and shows relative weakness as a result. In contrast, DIA and SPY are already challenging resistance. Chart 5 shows XLF with a harami last week and a surge above 14.50 today. XLF remains in a downtrend with a lower low last week. I am concerned with relative weakness and the continued downtrend because finance remains a key market sector. Financials account for around 16% of the S&P 500 and 22.27% of the NY Composite. The bulls are probably holding back because financial reform remains a work in progress. This creates uncertainty that can make for indecisive trading. The big banks are also on the front lines of the European debt crisis. JP Morgan (JPM), Morgan Stanley (MS) and Citigroup (C) all have exposure to European debt. Even banks without direct exposure to European debt are part of the overall financial system that would be affected by further problems in Europe. Financials provide a litmus test for the global financial system and are an important part of any advance (or decline). Chart 6 shows the Regional Bank SPDR (KRE) also within a downtrend and also showing relative weakness.
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Chart 5
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Chart 6
UTILITY SPDR BREAKS RESISTANCE TO SHOW LEADERSHIP... Last week I featured the Utilities SPDR (XLU) and the Healthcare SPDR (XLV) showing relative strength. Both declined less than the S&P 500 ETF and this caused their price relatives to rise. The price relative is a ratio chart (XLU:SPY or XLV:SPY). The ratio rises when the SPDR outperforms and falls when it underperforms. This ratio can rise simply when the SPDR falls less than SPY. Along with consumer staples, utilities and healthcare represent the defensive side of the market. Defensive sectors benefit when the going gets tough. Chart 7 shows XLU firming at 28 and breaking above resistance with two white candlesticks last week and a gap up today. XLU and XLE are the only two SPDRs to exceed their late May highs. The price relative bottomed in mid May and remains in an uptrend.
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Chart 7
EURO GETS AN OVERSOLD BOUNCE... The Euro extended its oversold bounce with a surge above 122 on Monday. Strength in the Euro goes hand-in-hand with strength in US stocks (and Euro stocks). Chart 8 shows the Euro ETF (FXE) within a clear downtrend, which means advances are counter-trend moves. This means we can expect resistance sooner rather than later. The late May high and broken support from the early May low combine to mark a resistance zone around 125. Frankly, I would be surprised to see the Euro make it this far on its first rally attempt. The indicator window shows RSI oscillating between 60 and 20 since early December. This is the typical range during a strong downtrend. The 50-60 zone will continue to act as resistance in a downtrend.
