FINANCIALS FAIL AT RESISTANCE AND SHOW RELATIVE WEAKNESS -- UTILITIES SPDR CONTINUES TO SHOW RELATIVE STRENGTH -- TIP AND GLD WEAKEN TOGETHER -- JAPAN FOLLOWS US, BUT CHINA GETS A BIG BOUNCE -- NATURAL GAS ETFS FORM FALLING CHANNELS

FINANCIALS FAIL AT RESISTANCE AND SHOW RELATIVE WEAKNESS ... Link for todays video. Relative weakness in the finance sector weighed heavily on the market last week. All nine sectors and the S&P 500 were down for the week, but the finance sector was the only sector to loose over 2%. The broader market is unlikely to sustain an advance when this key sector shows relative weakness. I wrote about the Financials SPDR (XLF) and Regional Bank SPDR (KRE) hitting resistance last Wednesday. Both moved sharply lower to affirm resistance. Chart 1 shows XLF hitting resistance around 15 three times since late May. XLF failed to hold last Tuesdays gap higher and filled the gap with a long red candlestick on Friday. Resistance at 15 has been affirmed. A break above this level is needed to reverse the downtrend in XLF. The ETF is showing some resilience today with a dip below 14 and sizable recovery intraday. Should a higher low form, it is possible that an inverse head-and-shoulders pattern takes shape (blue arrows). This pattern would be confirmed with a break above 15. Unconfirmed, this pattern is merely a consolidation within a bigger downtrend.

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Chart 1

Chart 2 shows the Regional Bank SPDR getting clobbered over the last few days. The ETF surged to resistance early last week, but stalled with an inside day on Wednesday and declined sharply the last three days. This decline reinforces resistance just above 25. Regional banks are one of the weakest links within the finance sector. KRE is currently trading near its mid June low. Should the ETF find support around 23 and bounce, it is possible that an inverse head-and-shoulders pattern evolves. As with XLF, this potential pattern would not be confirmed unless KRE breaks above its June-July highs.

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Chart 2

UTILITIES SPDR CONTINUES TO SHOW RELATIVE STRENGTH ... Utilities remain one of the few bright spots in the market. Chart 3 shows the Utilities SPDR (XLU) surging to triangle resistance and consolidating the last five days. Actually, the ETF was up four of the last five days. Like the rest of the market, XLU was knocked for a sharp loss on Friday. Unlike the rest of the market, XLU has already recovered all of Fridays losses. The ETF is hugging resistance as buying pressure continues. A break above last weeks high would signal a continuation of the early July surge. Such a move would also break resistance from the large symmetrical triangle. The bottom indicator shows the price relative moving to its highest level of the year.

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Chart 3

TIP AND GLD WEAKEN TOGETHER... Last week I wrote about the wedge support break in the Gold ETF (GLD). Today, the Inflation-Protected Bond ETF (TIP) is following gold lower with a flag support break. Chart 4 shows that GLD and TIP have enjoyed a positive correlation over the last eight months. Both moved higher from September to November, both corrected from December to March and both moved higher from April to June. Both are now moving lower in July. The Inflation-Protected Bond ETF may be having second thoughts on inflation - as may gold. Last week, the Producer Price Index (PPI) came in lower than expected and the Consumer Price Index (CPI) declined for the third month running. John Murphy noted that some Fed governors were also starting to worry about deflation and wrote about deflation on Thursday. The indicator window shows the Inflation-Protected Bond ETF relative to the 20+ Year T-Bond ETF (TLT). TIP outperformed from November to December and then started underperforming in 2010. Relative weakness in the Inflation-Protected Bond ETF suggests little concern with inflation.

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Chart 4

Chart 5 shows TIP breaking flag support with a sharp decline on Monday. Technically, the bigger trend remains up as TIP broke a major resistance zone with the April-May surge. However, the break below flag support targets short-term weakness towards the next support zone around 104-104.5.

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Chart 5

Gold also moved lower on Monday. Chart 6 shows the Gold ETF (GLD) entering the support zone around 114-116 after breaking the February trendline. As with TIP, the bigger trend for GLD remains up. The current decline is viewed as a correction within this uptrend. Last weeks high now marks resistance.

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Chart 6

JAPAN MOVES LOWER, BUT CHINA GETS A BIG BOUNCE... After Fridays sharp decline in US stocks, most Asian indices moved lower on Monday. The Nikkei 225 ($NIKK) was hit hard with a 2.86% loss, but that was on Friday. The other major Asian indices, which were open, declined less than 1% on Monday and held up relatively well. Chart 7 shows the Nikkei 225 hitting resistance at the falling wedge trendline around 9800. With the decline on Thursday-Friday, the Nikkei formed a lower high and established key resistance. It would take a move above 9800 to re-assess the current downtrend. The indicator window shows the Nikkei and S&P 500 moving together over the last five months. The S&P 500 also has a falling wedge working since April, but notice that the Nikkei peaked a couple weeks ahead of the S&P 500.

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Chart 7

The Shanghai Composite ($SSEC) bucked the overall trend on Monday by posting a 2.11% gain. Considering the losses in the US on Friday, this is especially impressive. Chart 8 shows the Shanghai Composite breaking down in mid April and moving to new lows in July. The index broke down earlier than the S&P 500, but both moved lower from late April until early July. The Shanghai Composite broke triangle support with a sharp decline at the end of June and then bounced in July. While the S&P 500 moved sharply lower on Friday, the Shanghai Composite firmed and then surged on Monday. Broken support around 2500 turn into the first resistance to watch for a short-term breakout. The indicator window shows the Shanghai Composite relative to the S&P 500. Chinese stocks have been showing relative weakness since March. The price relative needs to break above its late June high for the Shanghai Composite to start showing relative strength.

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Chart 8

NATURAL GAS ETFS FORM FALLING CHANNELS... The long-term trend for natural gas remains down, but the pullback after the June surge warrants attention for a possible continuation breakout. We have seen failed surges in natural gas before. After all, that is what a downtrend is all about. Natural gas surged in September-October and then moved to new lows. The commodity surged in December, but again failed to follow through and moved to new lows. Chart 9 shows the US Natural Gas Fund (UNG) surging above resistance with a move above 8.5 in June. The ETF has since pulled back with a falling channel taking shape. UNG already passed the 62% retracement so this decline is more than expected for just a pullback or correction. However, I will still be watching channel resistance around 8. A surge above 8 would break channel resistance and call for a continuation of the May-June surge. Chart 10 shows the iPath Natural Gas ETF ($GAZ) with a similar pattern. UNG averages around 27 million shares volume per day, while GAZ averages just 205,000 shares. While both are tied to the performance of natural gas, they may not exactly follow natural gas prices. Commodity ETFs are made from a basket of futures contracts and have management fees.

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Chart 9

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Chart 10

SHORT VACATION... I will be off Wednesday, Thursday and Friday. My next Market Message commentary and video will be on Monday, July 26.