QQQQ REMAINS ON P&F SELL SIGNAL -- SPY FAILS AT P&F RESISTANCE -- IWM TESTS P&F SUPPORT -- PERIPHERAL EUROPEAN INDICES LEADING THE WAY LOWER -- CORE EUROPEAN INDICES FAIL AT RESISTANCE -- EURO WEIGHS ON MARKETS WITH SHARP DECLINE
QQQQ REMAINS ON P&F SELL SIGNAL... Link for todays video. The Nasdaq 100 ETF (QQQQ), S&P 500 ETF (SPY) and Russell 2000 ETF (IWM) capture three important market segments. QQQQ captures technology, IWM reflects the performance of small-caps. SPY covers large-caps and the broader market). As John Murphy pointed out in his August 5th Market Message, Point & Figure charts offer simplicity and precision. In addition, support and resistance levels are quite easy to identify. In fact, one could apply the Dow Theory principle of confirmation to generate broad market buy and sell signals using these three ETFs. A buy signal is in force when all three forge higher highs or break resistance. A sell signal is in force when all three forge lower lows or break support.
Lets start with QQQQ. Chart 1 shows QQQQ with clear battle lines for 2010. The ETF bounced off the 41.5-42 area in February, May and early July. On the upside, the ETF hit resistance in the 47-48 area in June and early August. Look for a break above the June-August highs to signal a continuation higher or a break below the 2010 lows to usher in a downtrend. Notice that QQQQ is currently on a P&F sell signal. There was a triangle breakdown on June 30th. This is shown with the o just above the 7, which denotes July. Even though QQQQ broke back above the upper trendline of the triangle, QQQQ did not exceed resistance at 48. Note: Annotations were done with a separate drawing program.
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Chart 1
SPY FAILS AT P&F RESISTANCE... Chart 2 shows SPY with a support break and snapback rally. The June decline was strong enough to push prices below the prior two lows and forge a descending triple bottom support break on July 1. This is denoted by the red 7 on the chart. Red has nothing to do with the support break. The color simply offers good contrast to mark the beginning of a month. Despite a pretty strong snap-back rally, SPY did not break above its prior high, which is denoted by the red 6. SPY came awfully close, but no cigar. A break above this level would change the P&F picture from bearish to bullish. It aint happened yet. For now, SPY remains in bear mode with the support break as the last P&F signal. The downside price objective is 90.
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Chart 2
IWM TESTS P&F SUPPORT... Chart 3 shows IWM with a consolidation over the last three months. There was a double bottom support break in July (red 7) and then a double top resistance break later in July. This breakout is the current signal with a price objective at 80. Despite this bullish price objective, notice that a high-pole warning flashed on July 29. This is because IWM gave back more than half of the advance that produced the double top breakout. The last column of Os has now fully retraced the prior column of Xs. This high-pole warning is warning of a failed breakout. One more o in this column would produce a double bottom support break and put IWM back on a bear signal.
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Chart 3
DOW THEORY CONFIRMATION APPLIED TO PNF... Applying the Dow Theory principle of confirmation, we can see that two of the three ETFs are on P&F sell signals (QQQQ and SPY). IWM is the lone hold out on for P&F signals. Looking at support and resistance, we can see that IWM and SPY forged lower lows in early July. QQQQ has yet to break support and remains the hold out. At this point, 2 of 3 are bearish in each category and this means we should have a bearish bias regarding the broad market right now.
PERIPHERAL EUROPEAN INDICES LEADING THE WAY LOWER... The June decline in global equities was largely attributed to the sovereign debt crisis in Europe, which led to sharp declines in the Euro and European equities. These fears may be rekindling because August has not been a kind month for European equities. PerfChart 4 shows the S&P 500 with seven European indices, the Nikkei and the Shanghai Composite. The S&P 500 and European indices are down sharply in August. Notice that the Spain Bolsa ($IBEX), the Athens General ($ATG) and the Dow Ireland Index ($IEDOW) are leading the way lower with the largest losses. The Nikkei is modestly lower, but the Shanghai Composite is modestly higher. It is positive to see China outperforming again, but pervasive weakness in the rest of the world is more than offsetting strength in Chinese equities. In fact, it appears that money is rotating East.
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Chart 4
CORE EUROPEAN INDICES FAIL AT RESISTANCE... The charts for the Netherlands Index ($AEX) and the French CAC 40 ($CAC) are quite similar to the S&P 500 over the last several months. All three declined sharply from late April to late May, rebounded in early June, tested support in early July and surged into early August. Like the S&P 500, the Netherlands Index and French CAC 40 both failed at resistance from the June highs and declined sharply in August. Chart 5 shows the Netherlands Index hitting resistance around 340 in early August and moving below 325. The index declined below 320 on Friday. Chart 6 shows the French CAC 40 hitting resistance around 3800 and moving below 3600 this week. The index declined below 3550 on Friday. It should also be noted that these indices broke major support levels with the July decline. Furthermore, the price action from late May to early August formed a large volatile consolidation. With such a decisive failure at resistance, it looks like a continuation of the bigger downtrend is getting underway.
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Chart 5
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Chart 6
The German DAX is shown separately because it has been much stronger than the S&P 500 and other European indices. Chart 7 shows the DAX testing its June high and even breaking above its June high for a few days in early August. This June high is different because it also marks the April high. The DAX was one of the few indices in the world to exceed its April high. The break above the April high did not hold as the DAX came down with the rest of Europe over the last two weeks. With further weakness today, the DAX broke below short-term support around 6050.
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Chart 7
EURO WEIGHS ON MARKETS WITH SHARP DECLINE... Why all the fuss over European equities and the Euro? Chart 8 explains it quite well. For whatever reason, there is clearly a positive correlation between the S&P 500 ETF (SPY) and the Euro ETF (FXE). From April until now, these two have been rising and falling together. Both fell in April-May, rose in July and are falling again in August. Chart 9 shows the Euro ETF (FXE) hitting resistance from broken support around 132.5 in early August and moving sharply lower the last two weeks. FXE is down around 1% in early trading on Friday and weighing on US stocks. The indicator window shows the Commodity Channel Index (CCI) moving below its late June low and into negative territory. Momentum is clearly bearish and the Euro appears headed for a test of its June lows. This would be quite negative for stocks.
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Chart 8
