EUROPEAN INDICES LEAD GLOBAL RALLY -- XLF BOUNCES OFF LONG-TERM SUPPORT AND CHALLENGES RESISTANCE -- REGIONAL BANKS CONTINUE TO LAG -- OIL AND OIL SERVICE STOCKS BREAK RESISTANCE -- STOCKS AND BONDS MOVE IN OPPOSITE DIRECTIONS
EUROPEAN INDICES LEAD GLOBAL RALLY... Link for todays video. Banks led European stocks higher on Monday with most country indices gaining over 2%. Leadership from banks, such as Frances biggest (BNP Paribas), shows increased confidence in the European banking system. This confidence also facilitated a sharp rally in the Euro. Even though some key European stock indices are trading near resistance levels, todays sharp gains show buying pressure continuing on the first trading day of August. July produced big gains and August is off to a bullish start. Chart 1 shows the French CAC 40 ($CAC) finding support in the 3300-3350 area in May-June-July and surging to resistance in the 3700-3750 area. This area marked resistance in May-June-July. Hmmm. That sounds like a trading range. Chart 2 shows the Netherlands Index ($AEX) with a similar chart pattern and trading range.
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Chart 1
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Chart 2
Chart 3 shows the German DAX ($DAX) with a stronger chart pattern. While the French CAC 40 and Netherlands Index tested their May lows, the German DAX held well above its May lows and firmed around 5800-5850. Also notice that the DAX is challenging resistance from the April-July high with todays surge. In contrast, the French CAC 40 and Netherlands Index are not even close to their April highs. The DAX is clearly the European leader in 2010. PerfChart 4 shows the performance for the S&P 500, German DAX and four other European indices since early January. Only the DAX sports a gain for 2010.
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Chart 3
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Chart 4
XLF BOUNCES OFF LONG-TERM SUPPORT AND CHALLENGES RESISTANCE... The Financials SPDR (XLF) bounced off long-term support yet again, but remains just shy of a resistance breakout on the daily chart. Strength in Europe and European banks could carry over to the big US banks, which dominate XLF. Chart 5 shows weekly candlesticks over the last 18 months. XLF surged from March to August 2009 and then moved into a long trading range. The ETF established support just above 13 in August and this support level has held for 12 months with the most recent bounce occurring last month. Notice that a falling wedge evolved from April to June and the July surge broke the wedge trendline. Also notice that RSI crept back above 50 for the first time since early May. Chart 6 shows daily prices with the ETF challenging resistance at 15 and an inverse head-and-shoulders taking shape (blue arrows). A break above neckline resistance at 15 would be bullish. Chart 7 shows JP Morgan (JPM) surging above its July highs. Chart 8 shows Berkshire Hathaway (BRK/B) breaking above wedge resistance.
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Chart 5
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Chart 6
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Chart 7
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Chart 8
REGIONAL BANKS CONTINUE TO LAG... While the big financials in XLF are pushing for a breakout, the smaller banks in the Regional Bank SPDR (KRE) are not keeping pace. With the S&P 500 above its mid July high and XLF challenging its mid July high, KRE shows relative weakness by remaining below its corresponding high. This puts a damper on the stock market rally. Chart 9 shows KRE with a potential double bottom in July. The intermittent high marks resistance just above 25, but KRE remains well below this resistance level. Last weeks decline looks like a falling flag and todays surge broke flag resistance. Todays gap best hold. A move below 23.5 would be negative.
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Chart 9
OIL AND OIL SERVICE STOCKS BREAK RESISTANCE... Strength in equities around the world lifted crude above $80 a barrel and to its highest level since mid May. Strength in equities bodes well for the economy, which in turn bodes well for energy demand. As such, stocks and oil have been moving step-for-step in 2010. Todays rally simply confirms this positive correlation. Chart 10 shows the US Oil Fund ETF (USO) breaking resistance with a surge above 36 today. The next resistance area is around 38, which marks a 62% retracement of the April-May decline and broken support. Chart 11 shows the US Gasoline Fund ETF (UGA) following suit with a breakout. Chart 12 shows the Oil Service HOLDRs (OIH) also breaking resistance with a gap and surge above 107.
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Chart 10
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Chart 11
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Chart 12
STOCKS AND BONDS MOVE IN OPPOSITE DIRECTIONS... John Murphy wrote about the negative correlation between stocks and bonds over the weekend. However, even though stocks surged in July, bonds and long-term interest rates were essentially flat. Something needs to give here. Strength in stocks is undermined as long as bonds hold support. Even though bonds did not break support today, they made a move in that direction as stocks surged. Chart 13 shows the S&P 500 ETF (SPY) gapping above 112 today and scoring a big gain. Even though the current advance is steep, the trend is firmly bullish as long as the gap and support from last weeks low hold. Chart 14 shows the 20+ Year T-Bond ETF (TLT) with a trading range the last 4-5 weeks. The rally in stocks took the wind out of the bond bulls, but TLT has yet to break support around 98. Bonds moved lower today after the ISM Manufacturing Index came in better than expected. This economic barometer has been above 50 since July 2009 and reflects continued economic expansion. Chart 15 shows the 10-Year Treasury Yield ($TNX) bouncing off support around 29 (2.9%). A break below this level would signal a continuation lower for rates. This would be bullish for bonds and bearish for stocks. The economic calendar is quite full this week with the employment report scheduled to hit the fan on Friday.
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Chart 13
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Chart 14
