NASDAQ BREADTH INDICATORS CHALLENGE RESISTANCE -- NYSE AD LINE AND NET NEW HIGHS BREAK RESISTANCE -- S&P 500 STALLS ABOVE TRENDLINE BREAK -- NATURAL GAS ETF COMES TO LIFE -- NATURAL GAS INDEX FOLLOWS THE S&P 500 -- CHESAPEAKE ENERGY CONSOLIDATES IN JULY
NASDAQ BREADTH INDICATORS CHALLENGE RESISTANCE... Link for todays video. With the July surge, key breadth indicators for the Nasdaq are challenging resistance from their June highs - as is the Nasdaq itself. Chart 1 shows the Nasdaq as a 5-day EMA and 63-day EMA. Why these exponential moving averages? I am using a 5-day EMA to simply smooth the daily fluctuations. A 63-day moving average represents one quarter. This moving average turned up over the last few days and the 5-day EMA moved above it. This is possible, but the Nasdaq remains below its last reaction high, which was in mid June. The index has yet to reverse its string of lower lows and lower highs until it breaks this June high. The lower windows shows the AD Line (black) below its June high and the AD Volume Line (green) challenging its June high. The index and these two indicators are clearly at their make-or-break points. Another surge would push them above resistance for breakouts. The bottom window show Net New Highs surging and failing to take out the early May high around 100. This indicator also needs another push for a bullish breakout. Next Fridays employment report could assist the make or the break.
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Chart 1
NYSE AD LINE AND NET NEW HIGHS BREAK RESISTANCE... The NY Composite and NYSE breadth indicators paint a different picture. The NYSE counterparts are more bullish with the NY Composite breakings its June high and two key breadth indicators following suit. Chart 2 shows the NY Composite as a 5-day EMA and 63-day EMA. The 5-day EMA broke above the June high and exceeded the 63-day EMA. This higher high signals the start of an uptrend. The NYSE AD Line was holding up quite well in June and early July. Relative strength turned to absolute strength as the indicator broke above the June high, which is clearly bullish. The AD Volume Line (green) also moved higher, but has yet to take out the June high. It is close though. Finally, Net New Highs surged above 100 and broke above their May-June highs. Breakouts in the AD Line and Net New Highs show increasing participation in NYSE stocks. This is why I think this rally has legs. A move below the mid July lows in the NY Composite, AD Line and AD Volume Line would break these legs.
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Chart 2
S&P 500 STALLS ABOVE TRENDLINE BREAK... With the July surge, the S&P 500 bounced off two key retracements and broke above the falling wedge trendline. There is always debate on where to draw retracements. Chart 3 shows the entire 2009-2010 advance in the S&P 500. With the April-June decline, there were two possible moves upon which to base retracements: the move from March 2009 to April 2010 or the move from July 2009 to April 2010. Instead of choosing one of these, chartists can draw the Fibonacci Retracements Tool based on both and look for retracement convergence. The gray Fibonacci retracement lines extend from March to April and the pink retracement lines extend from July to April. A 38.2% retracement of the March-April advance and a 61.8% retracement of the July-April advance converge around 1000 (1005-1009 to be exact). These retracements marked support in early July.
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Chart 3
The April-June decline looks corrective, but a full trend reversal requires a break above the mid June high. There it is again - that pesky mid June high. In addition to retracement support, the April-June decline formed a falling wedge with an ABC correction. Both patterns are typical for corrections - as is the retracement. Based on patterns and retracements, it looks like the correction has played out and the bigger uptrend is resuming. The index broke above its wedge trendline and MACD(5,35,5) moved back above its signal line for the first time since April. The June high represents the final hurdle for a trend reversal. With last weeks long white candlestick, the index also established a support area around 1050. A strong breakout should hold and a move back below 1050 would call for a re-evaluation. Chart 4 shows the Russell 2000 ($RUT) with similar characteristics.
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Chart 4
NATURAL GAS COMES TO LIFE... Natural gas has been in a downtrend since the summer of 2008, but shows signs of life with a wedge breakout on the daily chart. Chart 5 shows the US Natural Gas Fund (UNG) peaking around 65 in June-July 2008 and declining below 10 just over a year later. Despite some bounces along the way, the ETF always managed to form a lower high and move to a new low. That may be changing as the ETF broke above the trendline extending down from May 2009 and the trendline extension turned into support in July (green arrow). A higher low could be taking shape. The indicator window shows RSI hitting 50 in June, which was its highest level since July 2008. Notice that RSI has been below 50 since July 2008, which is testament to a consistent downtrend. A break above 50 would be bullish for momentum. It is also worth noting that the 20-week Aroon oscillator turned positive for the first time since July 2008.
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Chart 5
Chart 6 shows daily candlesticks for some detail. UNG consolidated in April-May and then broke resistance with a surge in early June. The ETF corrected back to 7.2 with a falling channel and then broke channel resistance with a surge above 7.8 this week. Ideally, UNG should have found support around 7.6, which is near the breakout and the 50-62% retracement zone. However, the Mr. Market is far from ideal. Nevertheless, the breakout is valid until proven otherwise. A move below 7.5 would be negative and a break below the July low would put the bears back in control.
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Chart 6
NATURAL GAS INDEX FOLLOWS THE S&P 500 ... The NYSE Arca Natural Gas Index ($XNG) is an index of 17 stocks related to natural gas in some way, shape or form. There are 17 components that each weigh around 6%. Apache (APA) is the largest component with a 6.95% weighting and Southwestern Energy is the smallest with a 5.92% weighting. Chart 7 shows $XNG with a zigzag lower since the April high. The current zag is up as the index bounced with the rest of the market in July. Like the rest of the S&P 500, this Natural Gas Index has yet to break its June high and fully reverse the spring-summer downtrend.
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Chart 7
CHESAPEAKE ENERGY CONSOLIDATES IN JULY... Chart 8 shows Chesapeake Energy (CHK) within a downtrend throughout 2010. The stock surged in late May and early June when natural gas surged, but fell back just as natural gas did at the end of June. The US Natural Gas Fund is shown in the bottom window. Chesapeake has been following this ETF pretty well in 2010. With the US Natural Gas Fund perking up, Chesapeake has an important support test at hand. The stock has been firming around 20.3-21 the entire month. A break below the July lows would signal a continuation lower. Should the stock hold support here, a break above the July high would be bullish and open the door to a bigger resistance challenge. Chart 9 shows Devon Energy (DVN) with similar characteristics.
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Chart 8
