DIA TESTS BROKEN RESISTANCE -- SPY FAILS TO HOLD BREAKOUT -- BOND ETF BREAKS RESISTANCE -- DOLLAR DIPS AS EURO BOUNCES -- GERMANY AND THE NETHERLANDS LEAD EUROPEAN STOCKS -- FRANCE HITS RESISTANCE AS ENGLAND LAGS
DIA TESTS BROKEN RESISTANCE... Link for todays video. The Fed left rates unchanged and indicated that it would continue to do so for an extended period of time. Nothing new here. The Fed also noted that the European debt crisis could have an adverse affect on US growth. Stocks finished the day slightly negative with no real reaction to todays policy statement. Chart 1 shows the Dow SPDR (DIA) firming around 103 today. This is the scene of the mid June breakout and this broken resistance level could turn into support. After a sharp surge from 98 to 106 (low to high), DIA was overbought and ripe for a pullback or consolidation. DIA definitely got the pullback. Now for the support test. Failure to hold 102 would negate the breakout. Strong breakouts hold. Weak breakouts fold. The indicator window shows MACD (5,35,5) stalling around the zero line and rolling over. MACD has yet to cross below its signal line, but a bearish cross in negative territory would be bearish for momentum here.
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Chart 1
SPY FAILS TO HOLD BREAKOUT ... Even though DIA is testing its breakout, SPY failed to hold its breakout and IWM did not even forge a confirming breakout. It appears that not everyone is singing from the same song book here. Chart 2 shows the S&P 500 ETF (SPY) breaking resistance in mid June and moving below this breakout over the last three days. The indicator window shows RSI stalling in the 50-60 zone and then breaking below 50 this week. The 50-60 zone typically acts as resistance in a downtrend. 50 marks the centerline for RSI. Momentum has a bullish edge above 50 and a bearish edge below 50. Chart 3 shows the Russell 2000 ETF (IWM) hitting resistance from the late May and early June highs over the last two weeks. In contrast to SPY and DIA, IWM did not breakout and shows relative weakness. The indicator window confirms with the price relative (IWM/SPY ratio). This indicator peaked in mid May and has been working its way lower the last 5-6 weeks.
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Chart 2
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Chart 3
BOND ETFS BREAK RESISTANCE... The Fed is unlikely to change policy as long as bonds keep rising and yields keep falling. Bonds are like a litmus test for the economy. As John Murphy noted on Tuesday, weakness in the Home Construction iShares (ITB) is a sign of weakness in the economy. We can also throw in weakness in the Retail SPDR (XRT) and Best Buy, which I wrote about on Monday. In addition to relative weakness in these key economic groups, bonds are also benefitting from extended Fed policy and European debt problems. The Fed sets interest rates with policy, while the bond market sets interest rates with price movement. Yields rise when bond prices decline and yields fall when bond prices advance. The bond market usually leads the Fed. In other words, interest rates often turn up in the bond market before the Fed changes policy. With bond prices hitting new highs or near new highs, long-term interest rates in the US remain low and falling. No signs of a change in Fed policy here. Chart 4 shows the 7-10 Year Treasury ETF (IEF) surging further above resistance today. John wrote about IEF breaking its May high on Tuesday. The breakout signals a continuation of the strong uptrend. It also reinforces support at 92.77 from the mid June lows. Chart 5 shows the 20+ Year T-Bond ETF (TLT) following suit with a triangle breakout over the last three days. This breakout also reinforces the current uptrend in bonds and support at 96.
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Chart 4
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Chart 5
DOLLAR DIPS AS EURO BOUNCES... Chart 6 shows the DB Dollar Bullish ETF (UUP) at a make-or-break area. The ETF declined to around 25 and firmed over the last five days. Support at 25 stems from broken resistance and the 38% retracement mark. With todays weakness, UUP established resistance to watch in the coming days. RSI is also trading in its make-or-break zone. This momentum oscillator should hold the 40-50 zone in an uptrend. Look for a move back above 50 to turn momentum bullish again. A break below 40 would be negative. Chart 7 shows the Euro ETF (FXE) with a mirror image of the UUP. FXE surged to 124 and then pulled back over the last four days. The overall trend remains down and FXE has yet to break even its first resistance level. The Euro was up a little today, but it would take follow through above 124 to produce a meaningful breakout. Such a breakout would show confidence in the beleaguered currency that could lift global equities. Failure to take out resistance and a move lower would weigh on stocks.
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Chart 6
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Chart 7
GERMANY AND THE NETHERLANDS LEAD EUROPEAN STOCKS ... The European equity markets rallied with the rest of the world over the last few weeks, but many key indices are now near potential resistance zones that could limit further gains or foreshadow a peak. Chart 8 shows the German DAX ($DAX) challenging its April highs. This makes it by far the strongest equity market in Europe and possibly the world. Very few indices recovered all their losses from the April-May decline. The DAX has. German exporters benefit from a lower Euro. Financially, Germany is one of the strongest European countries. Money that must remain in Europe is also attracted to the index/country showing relative strength. Despite strength, the DAX is running into potential resistance around 6300 from the April-May highs. Chart 9 shows the Netherlands Index ($AEX) breaking its mid May high with a rally the last five weeks. Dutch exporters also benefit from a weak Euro. Financially, the Netherlands is in better shape than the countries of southern Europe. Despite a breakout, the index remains close to the mid May high and the 62% retracement, which could mark a resistance zone.
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Chart 8
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Chart 9
FRANCE HITS RESISTANCE AS ENGLAND LAGS ... Chart 10 shows the French CAC 40 ($CAC) hitting retracement resistance this week. After a sharp decline in April-May, the index retraced 50-62% with a rather sharp advance the last five weeks. The two week surge off support is especially impressive. Nevertheless, the first important test is at hand. A corrective rally should fail in the 3700-3800 area. A move above 3800 would suggest more than just a correction rally and open the door to a test of the April high, just like the DAX, but a lot later. Chart 11 shows the London FTSE ($FTSE) as the weakest of the four. The index retraced less than 50% of the April-May decline. A rising wedge is taking shape over the last five weeks. Technically, the trend is up as long as the wedge rises.
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Chart 10
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Chart 11
CHINESE STOCK MARKET CONTINUES TO SHOW RELATIVE WEAKNESS... Chart 12 shows the Shanghai Composite ($SSEC) with relative weakness and a consolidation near the May lows. Even though European and North American equity markets rebounded, the Shanghai Composite did not partake and formed a triangle over the last five weeks. The index surged after Mondays currency news, but failed to follow through and remains below its first resistance level. Follow though and a break above 2600 are needed to get this index moving on the upside. A consolidation after a sharp decline (April-May) is typically a continuation pattern. The triangle represents a rest within the bigger downtrend. A break below 2500 would signal a continuation lower and this could weigh on global equities.
