SPY FORMS LOWER HIGH WITH WEEKLY REVERSAL -- NASDAQ AD VOLUME LINE FAILS TO BREAK RESISTANCE -- NYSE AD LINE FORMS LOWER HIGH AS SMALL-CAPS WEAKEN -- NET NEW HIGHS TURN NEGATIVE -- CONSUMER DISCRETIONARY AND FINANCE WEIGH ON MARKET
SPY FORMS LOWER HIGH WITH WEEKLY OUTSIDE REVERSAL... Link for todays video. The long-term uptrend is in jeopardy after the major index ETFs reversed near key retracements and formed lower highs. Stocks peaked in April with the major index ETFs declining sharply in April-May. After battling support from the February lows from late May to early June, stocks surged with a strong move and most of the major index ETFs broke resistance in mid June. The advance extended last week and the major index ETFs retraced 50-62% of the April-May declines. After this sharp two week advance, stocks were overbought and ripe for a pullback or consolidation. Instead of a little profit taking, stocks opened strong on Monday morning and then declined the next four days. The depth and strength of the decline looks like more than mere profit taking. The major index ETFs moved back below their breakouts to question the validity of these breakouts. This weeks decline also raises the possibility of a lower high taking shape. In addition, the June rally failed where a bear market rally should fail - in the 50-62% retracement zones. Chart 1 shows the S&P 500 ETF (SPY) with the characteristics listed above.
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Chart 1
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Chart 2
Chart 2 shows weekly prices for a bigger perspective. SPY established support around 104-105 with reaction lows in February and May. The two week June bounce reversed this week as SPY formed a weekly outside reversal. Also note that a bearish engulfing pattern is taking shape this week. SPY needs to close above 110 on Friday to prevent the bearish reversal patterns from forming. Even though the uptrend has yet to fully reverse, the weekly bearish engulfing increases the prospects for further weakness and support break. Also note that a decline to support would forge a head-and-shoulders reversal pattern. John Murphy alluded to this possibility in the Market Message on Tuesday, June 15th. A break below the February-May lows would certainly bring the bears out of the woodwork. It would also confirm the head-and-shoulders, which is still just potential at this point. While such a break may seem very bearish, I do see support around 100 from the Sep-Oct lows. The indicator window shows RSI moving back into the 40-50 zone this week. A break below 40 would turn long-term momentum bearish here.
NASDAQ AD VOLUME LINE FAILS TO BREAK RESISTANCE... While the Nasdaq and Nasdaq 100 broke resistance from their early June high, the Nasdaq AD Volume Line failed to confirm with a breakout and fell sharply over the past week. The AD Volume Line is a cumulative measure of Net Advancing Volume (volume of advancing stocks less volume of declining stocks). Because large-cap stocks tend to trade more volume than small and mid-cap stocks, this indicator reflects the performance of large-caps. As a breadth indicator, it is used to confirm or refute underlying strength. Chart 3 shows the Nasdaq AD Volume Line failing to break resistance and thus failing to confirm the breakout in the Nasdaq. A lower high formed this week and the indicator remains in a downtrend. A break above the June highs is needed to reverse this downtrend and turn this breadth indicator bullish again. For reference, the indicator window shows Net Advancing Volume on a daily basis.
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Chart 3
NYSE AD LINE FORMS LOWER HIGH AS SMALL-CAPS WEAKEN ... Chart 4 shows the NYSE AD Line with a lower high forming over the last two weeks. Despite a ravaging decline in the NY Composite, the NYSE AD Line had held up better by remaining well above its February lows. The NY Composite, in contrast, broke its February lows. The AD Line continued to show strength with a break above resistance in mid June. However, this surge/breakout did not last long as the index came down hard the last two weeks. It now appears that a lower high formed and a downtrend could be starting for the AD Line. This would be bearish for stocks. The AD Line represents small and mid-cap stocks because an advance counts as +1 and a decline as -1, regardless of market capitalization or volume. This means an advance or decline in ExxonMobil (XOM), which has a market cap of $282 billion and average daily volume of 30.5 million shares, counts the same as an advance or decline in Teco Energy (TE), which has a market cap of just $3.3 billion and average daily volume of 1.9 million shares. This volume differential also explains while the AD Volume Line reflects large-cap performance.
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Chart 4
Speaking of relative weakness in small-caps, chart 5 shows the Russell 2000 ETF (IWM) failing to break resistance and leading the way lower the last four days. The S&P 500 ETF, Dow SPDR and Nasdaq 100 ETF all broke resistance and forged higher highs last week, but the Russell 2000 ETF did not follow suit. It looked like IWM would break resistance with a big gap on Monday, but this gap failed miserably and the ETF declined from 68 to 63.50 in four days. Failure to breakout with the other ETFs shows relative weakness on the price chart. In addition, we can see relative weakness with the price relative (IWM:SPY ratio). Lower highs formed in early and mid June.
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Chart 5
NET NEW HIGHS TURN NEGATIVE AGAIN... There are three indicators (at least) for analyzing Net New Highs. First, we can simply look at Net New Highs (new 52-week highs less new 52-week lows). Second, we can apply a 10-day SMA to smooth the data. Third, we can create a cumulative Net New Highs line. Chart 6 shows all three indicators for the Nasdaq. The area chart shows actual new 52-week highs. Notice that this indicator was positive from early February until the end of April. It has since been moving in and out of positive territory the last eight weeks. The blue line shows the 10-day SMA of Net New Highs. This smooths the data and makes it less sensitive. This indicator dipped into negative territory in the second half of May and remains in negative territory. The large window shows Cumulative Net New Highs with the 10-day SMA (pink). This indicator peaked in mid May and moved lower the last five weeks. Overall, I would classify Nasdaq Net New Highs has bearish right now. First, the cumulative Net New Highs line is falling. Actual Net New Highs dipped below -100 four times since May and have not exceeded +100 since the second week of May. Also notice that Net New Highs moved back into negative territory this week.
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Chart 6
Chart 7 shows NYSE Net New Highs with the same indicators. At the top, the cumulative Net New Highs line has been flat since early May. This reflects a standoff over the last eight weeks. In the indicator window, the area chart shows Net New Highs dipping into negative territory in early May and moving on either side of the zero line the last eight weeks. This is why the cumulative Net New Highs line is flat. The 10-day SMA for Net New Highs moved into negative territory in late May and back into positive territory in mid June. However, I am looking for the area plot of Net New Highs to break its eight week range for a signal here. A break above +100 in new 52-week highs would be bullish, while a break below -100 would be bearish.
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Chart 7
RELATIVE WEAKNESS IN CONSUMER DISCRETIONARY AND FINANCE WEIGHS... Of the nine sectors in the S&P 500, I consider four to be the most important to overall market performance: consumer discretionary, technology, finance and industrials. I would call these the offensive sectors. Consumer discretionary is the most economically sensitive. Technology represents the appetite for risk. Finance represents the banking and financial system. Industrials represent the back bone of American manufacturing. At least three of these four need to show upside leadership to have a strong market. Perfchart 8 shows relative performance for the nine sector SPDRs from June 4th to June 17th, which covers the June surge. This is not the absolute gain/loss but rather the gain/loss relative to the S&P 500. Sectors that gained more show positive relative performance. Sectors that gained less show negative relative performance. Normally, one would expect leadership from the offensive sectors. However, the utilities, energy and materials sectors led the way higher during this surge. Industrials did their part by outperforming the S&P 500, but the consumer discretionary, finance and technology sectors underperformed. These three were up less than the S&P 500. This shows relative weakness that undermines the rally.
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Chart 8
KEY SECTORS TESTING IMPORTANT SUPPORT LEVELS... The next four charts cover the four offensive sectors. RSI is shown in the indicator window on all charts. This momentum oscillator is trading in the 40-50 zone, which marks long-term support for momentum. A break below 40 in RSI would be bearish for momentum. Chart 9 shows the Technology SPDR (XLK) with a potential head-and-shoulders over the last seven months. The right shoulder is under construction with a weekly outside reversal this week. A break below the February-June lows would confirm the pattern.
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Chart 9
Chart 10 shows the Consumer Discretionary SPDR (XLY) declining to support from the May-June lows with a sharp decline this week. There is also support in this area from broken support. A break below support would be bearish for the sector and the market.
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Chart 10
Chart 11 shows the Financials SPDR (XLF) failing to hold its March breakout by declining all the way back to support. The ETF bounce the prior two weeks, but fell back this week. Technically, the early June channel breakout is holding and XLF shows some promise here. A move above this weeks high would be bullish for the sector and could left the market. Failure to make it above this high and a break below support would be bearish.
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Chart 11
Chart 12 shows the Industrials SPDR (XLI) forming a weekly outside reversal and a lower high this week. The ETF gave up all its prior weeks gains and then some. This weeks high establishes resistance and a break above this level is needed for the bulls to regain the upper hand.
