KEY RETRACEMENTS COME INTO PLAY FOR DIA AND SPY -- IWM STALLS WITH SHORTER RETRACEMENT -- SMALL-CAPS AND MID-CAPS SHOW RELATIVE WEAKNESS -- OIL HITS RESISTANCE IN 50-62% RETRACEMENT ZONE -- OIL AND STOCKS CONTINUE MOVING TOGETHER
KEY RETRACEMENTS COMING INTO PLAY FOR DIA AND SPY... Link for todays video. There are at least two trends present in the current market: a medium-term downtrend since late April and a short-term uptrend since last week. With the bigger trend down, this short-term uptrend is considered a corrective move or oversold bounce. After a sharp decline or advance, the Fibonacci Retracements Tool can be used to estimate the extent of an oversold bounce or a correction. The S&P 500 ETF (SPY) and Dow SPDR (DIA) both declined around 10% from mid June to early July. An oversold bounce can be expected after such a sharp decline. Chartists can extend the Fibonacci Retracements Tool from the low to the high to estimate the extent of an oversold bounce. There are three levels to watch: 38%, 50% and 62%. Last weeks advance exceeded the 38% retracement and entered the zone between the latter two retracements. These two retracements mark a potential resistance zone that could foreshadow a reversal or consolidation. Chart 1 shows SPY entering the 50-62% retracement zone on Friday. Chart 2 shows DIA near the top of its 50-62% retracement zone. Chart 3 shows the Russell 2000 ETF (IWM) lagging the S&P 500 and Dow Industrials because it has yet to move into this retracement zone. Notice that IWM did not exceed the 50% retracement and is currently trading in the 38.2-50% retracement zone. In this respect, small-caps (IWM) are lagging large-caps (DIA and SPY).
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
SPY and DIA are shown with 14-day RSI. The orange shaded area shows the 50-60 resistance zone and the yellow area shows the 40-50 support zone. In general, short-term momentum is bullish when RSI breaks above 60 and then holds the 40-50 support zone. Momentum is short-term bearish when RSI breaks below 40 and then remains below the 50-60 resistance zone. RSI for SPY and DIA is currently hovering around 70, which is a sign of short-term strength. Watch for RSI to break 40 for a sign of short-term weakness in momentum. IWM shows the Aroon oscillator, which is quite easy to define as bullish or bearish. Aroon favors the bulls when positive and the bears when negative.
SMALL-CAPS AND MID-CAPS SHOW RELATIVE WEAKNESS ... Stocks ended mixed on Monday. The Nasdaq 100 ETF (QQQQ), S&P 500 ETF and Dow SPDR edged higher with small gains, but the Russell 2000 ETF and S&P 400 MidCap ETF (MDY) moved lower with modest losses. Again, we are seeing relative weakness in small-caps and mid-caps. This is not a good sign for the rest of the market. Small-caps and mid-caps are like the canaries in the coal mine because they are more dependent on the overall economy. They outperform in good times and underperform during bad times. Chart 4 shows the Russell 2000 ETF (IWM) within a clear downtrend since late April. The ETF bounced last week and met resistance near the late June gap. The price relative is shown comparing the performance of IWM to SPY in the indicator window. Relative strength peaked in mid May and small-caps have been showing relative weakness the last eight weeks. Chart 5 shows the S&P 400 MidCap ETF (MDY) also within a downtrend since late April. The price relative was flat from late April until mid June and then turned down the last few weeks. An important support test is underway as the price relative tests its May-June lows. A clean break would affirm relative weakness in mid-caps.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
OIL HITS RESISTANCE IN 50-62% RETRACEMENT ZONE... The US Oil Fund ETF (USO) also entered a retracement zone with last weeks bounce. First, lets take a step back and look at the pattern over the last few months. Chart 6 shows USO breaking rising wedge support with a sharp decline from mid June to early July. After a 10% decline in 10 days, the ETF was oversold and ripe for a bounce. That bounce came last week as the ETF moved back above 34. Applying the Fibonacci Retracements Tool, we can also see that USO retraced 50-62% of the prior decline. This marks a moment-of-truth for the rally. An oversold bounce within a bigger downtrend would likely fail near this retracement zone. Another push above 35 would call for a reassessment. RSI is shown hitting resistance in the 50-60 zone over the last few weeks. A break above 60 is needed to turn momentum bullish here. Chart 7 shows the US Gasoline Fund ETF (UGA) with a similar pattern at work.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
OIL AND STOCKS CONTINUE MOVING TOGETHER... Chart 8 shows the US Oil Fund ETF (black) and the S&P 500 ETF (red) moving together over the last five months. Both rose in March-April, declined in April-May and bounced in June. Stocks are likely taking the lead here because the stock market is a leading indicator for the economy. Weakness in stocks points to weakness in the economy, while strength in stocks suggests strength in the economy.
