MAJOR INDEX ETFS HIT RESISTANCE -- CONSUMER DISCRETIONARY ADVANCES INTO RESISTANCE ZONE -- HOMEBUILDERS AFFIRM SUPPORT WITH SURGE -- RETAILER SPDR LIMPS HIGHER -- FINANCE SECTOR CHALLENGES RESISTANCE -- REGIONAL BANK SPDR BOUNCES OFF FLAG SUPPORT
MAJOR INDEX ETFS RUN INTO RESISTANCE... Link for todays video. With the advance over the last five weeks, most major index ETFs are challenging resistance from their June highs and a key retracement zone. Chart 1 shows the Nasdaq 100 ETF (QQQQ) for starters. Resistance around 46-47.5 stems from the June highs and a 50-62% retracement of the April-July decline. Technically, QQQQ forged a lower low in early July and has yet to take out its prior high (the June high). This means that QQQQ has yet to fully reverse its downtrend with an upside breakout. The surge since early July is impressive and shows no signs of significant weakness. Before the bears can claim a victory at resistance, we need to see a reversal of this five week uptrend. In particular, notice how QQQQ gapped above 46 last Monday and this gap held all week. The low before this gap marks key support at 45. A move below this level would fill last weeks gap and break support. Then, and only then, can we consider the resistance challenge a failure. As long as the gap and support hold, the bulls are in control.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) with similar characteristics. IWM broke resistance around 64.5 and this area turned into support in late July and early August. In fact, IWM bounced off the 63.8 area twice in the last two weeks. The bulls have the edge as long as IWM holds above these lows. A break below the late July and early August lows would be quite negative. The price relative (IWM:SPY ratio) on this chart shows relative weakness in small-caps as it trends lower, which is negative for the market overall. The price relative surged in late July, but fell short of a breakout and turned lower the last two weeks. A break above the July high would show small-caps outperforming and this would be positive for the market overall.
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Chart 2
CONSUMER DISCRETIONARY ADVANCES INTO RESISTANCE ZONE... The chart for the Consumer Discretionary SPDR (XLY) shows characteristics similar to IWM and QQQQ. Chart 3 shows XLY moving into resistance from the June highs and 50-62% retracement zone. The ETF is up around 10% from its July high and shows no signs of significant weakness just yet. As with IWM and QQQQ, this resistance zone is a make-or-break point. A continuation above the June highs would show strength and be bullish. A failure in this resistance zone would be bearish. Once again, last weeks gap and the 30-July low mark a key support zone. A move below this low would signal a failure at resistance that could foreshadow a deeper decline. The indicator window shows the price relative trading flat the last five weeks. This means the consumer discretionary is keeping pace with the overall market, but not leading. A breakout is needed to show upside leadership in this key sector.
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Chart 3
HOMEBUILDERS AFFIRM SUPPORT WITH SURGE ... Strength in homebuilders is lifting the consumer discretionary sector on Monday. Chart 4 shows the Home Construction iShares (ITB) bouncing off support from the late July low. The three dashed trendlines represent three Fan Lines. ITB fell back after the first two breaks and recently broke the third. Perhaps the third time will be the charm. The lows around 11.30 mark key support. A move below this level would signal a failed breakout and downtrend resumption. Chart 5 shows the Homebuilders SPDR (XHB) affirming support with a surge above 15 on Monday. The late July and early August lows mark support in the 14.5-14.7 area. A move below this support zone would put XHB back in a downtrend. Before leaving these two charts, notice that the price relatives are trending lower. This means XHB and ITB are still underperforming the S&P 500 ETF.
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Chart 4
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Chart 5
RETAILER SPDR LIMPS HIGHER... Retailers are also an important part of the consumer discretionary sector. Chart 6 shows the Retail SPDR (XRT) breaking trendline resistance with a surge in mid July and then consolidating the last two weeks. The ETF retraced 50% of its prior decline with a one day spike above 40. For the most part, the ETF has been hitting resistance around 39, which represents a shallow 38% retracement. With a small triangle taking shape, a break above 39 would be bullish and open the door to the low 40s. The trendline extending up from the July low defines the 5-6 week uptrend. A move below support at 37 would end this trend and call for a continuation of the April-July decline. The indicator window shows the price relative in a clear downtrend as XRT underperforms the broader market. Relative weakness in this key group is negative for the market overall.
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Chart 6
FINANCE SECTOR STILL CHALLENGING RESISTANCE... The Financials SPDR (XLF) remains in the spotlight as it stalls near resistance around 15. Chart 7 shows the ETF closing above resistance last Monday, but falling back the next four days. This decline, however, was not drastic and the ETF managed to hold above 14.5 on Friday. Last weeks low and the late July low mark support at 14.5, which is confirmed by the trendline extending up from the early July low. For now, I would consider the cup half full as long as support at 14.50 holds. A break below 14.5 would signal a failure at resistance and possibly a continuation of the April-July decline. Relative to the S&P 500, XLF continues to show relative weakness as the price relative recorded a new reaction low in July. As you may have noticed, the price relatives for many key sectors and major index ETFs are trending lower and this shows relative weakness in these key areas.
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Chart 7
REGIONAL BANK SPDR BOUNCES OFF CONSOLIDATION SUPPORT... Chart 8 shows the Regional Bank SPDR (KRE) stalling near support from the late July low. KRE has been lagging the finance sector and the broader market the last five weeks, which is negative. Notice that KRE never reached its mid July high. After a surge above 24 in late July, the ETF consolidated the last two weeks. A break above the consolidation highs would signal a continuation of the late July surge and project a break above double bottom resistance. Needless to say, these would be positive developments for the market overall. But they have yet to happen. Barring a consolidation breakout, KRE remains an underperformer and in a clear downtrend. The Fed meets on Tuesday with a policy statement expected at 2:15PM ET. XLF and KRE could make defining moves once the Fed is out of the way.
