DIA AND QQQQ FILL THEIR GAPS WITH BREAKOUTS -- OFFENSIVE SECTORS GAP AND SURGE HIGHER -- EURO SURGES AS RISK-ON TRADE RESURFACES -- BONDS DECLINE AS MONEY FLEES SAFETY -- SHANGHAI COMPOSITE SHOWS RELATIVE STRENGTH -- EUROPEAN INDICES SURGE OVER 2%
DIA AND QQQQ FILL THEIR GAPS WITH BREAKOUTS... Link for todays video. Stocks moved sharply higher on Wednesday with a broad advance that lifted most boats. All major indices were up sharply. All sectors were higher with the biggest gains coming from industrials, energy, finance and consumer discretionary. Chart 1 shows the Nasdaq 100 ETF (QQQQ) holding above its July low and breaking wedge resistance with a surge above last weeks gap zone. Chart 2 shows the Dow SPDR (DIA) with a similar breakout in the works. I featured these two charts on Monday. Both QQQQ and DIA formed higher lows near their 62% retracement marks. Both gapped up and broke resistance with big moves. With higher lows forming, these breakouts are bullish until proven otherwise. A gap and breakout surge should hold. A move below 100 in DIA and 43.4 in QQQQ would question bullish resolve. It is also worth noting that the Commodity Channel Index (CCI) has yet to break into positive territory for either index. CCI requires some follow through before momentum turns bullish. It is also worth noting that QQQQ and DIA have been trading within a wide volatile trading range since May. While todays move certainly looks strong, it is still within the confines of a four month trading range. This means the trend could reverse again just as quickly.
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Chart 1
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Chart 2
OFFENSIVE SECTORS GAP AND SURGE HIGHER... The next four charts show the offensive sectors: consumer discretionary, finance, industrials and technology. I focus on these four to ascertain the underlying strength or weakness in a broad market move. Consumer discretionary represents the most economically sensitive sector. Finance represents the banks and financial system. Industrials represent manufacturing might. Technology represents the appetite for risk at the high-beta end of the market. It is important to see upside leadership from at least two of these sectors. Overall, the performance of these four remains mixed. All four gapped higher and broke short-term resistance with big moves on Wednesday. At the very least, these gaps and breakouts are bullish until proven otherwise. Chart 3 shows the Industrials SPDR (XLI) breaking resistance with a long white candlestick. Chart 4 shows the Consumer Discretionary SPDR (XLY) holding well above its July low and surging above resistance. Both formed higher lows and todays breakouts reversed the August downtrends. No signs of weakness here.
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Chart 3
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Chart 4
Potential problems arise when looking at the Financials SPDR (XLF) and the Technology SPDR (XLK). Chart 5 shows XLF surging off support with a gap and big move. Support around 13.50 withstood one heck of a test, but XLF is not fully out of the woods just yet. Technically, XLF did break its July low. At best, the ETF has been locked in a trading range since mid May (13.25 to ~15). The problem arises with relative performance. Relative to the S&P 500, XLF remains an underperformer. Chart 6 shows XLK holding above its July low and breaking above wedge resistance today. However, the price relative remains in a downtrend as XLK underperforms the S&P 500 ETF. Relative weakness in technology is not a good sign.
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Chart 5
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Chart 6
EURO SURGES AS RISK-ON TRADE RESURFACES... I have written numerous times on the risk-on versus risk-off trade. The risk-off trade was in force most of August as the Euro, stocks and oil declined. In contrast, money moved into relative safety offered by bonds and gold. Today is all about risk. Money is moving into the Euro, stocks and oil in a big way. Conversely, money is moving out of bonds and gold. Chart 7 shows the Euro ETF (FXE) finding support near the 50% retracement mark and surging around 1% on Wednesday. Despite the second big move in as many weeks, the FXE remains short of a breakout and the Commodity Channel Index (CCI) remains in negative territory. A little more upside is needed to produce a trend reversing breakout.
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Chart 7
BONDS DECLINE AS MONEY FLEES SAFETY... Bonds were clobbered for the second time in as many weeks. Chart 9 shows the 20+ Year T-Bond ETF (TLT) moving sharply lower last week with a long red candlestick below 106. Despite this big move, bonds rebounded on Monday-Tuesday as stocks moved lower. This rebound proved short-lived as bonds moved sharply lower on Wednesday. I am not ready to call this a downtrend, but there is room for further downside. TLT broke above resistance around 102 and broken resistance turns into the first support area to watch. Technically, this breakout was the last medium-term signal and it has yet to be negated. The indicator window shows TLT with the S&P 500. These two are pretty much mirror images with their negative correlation. Bonds moved sharply higher as stocks moved lower in August. Money is moving out of bonds today and finding its way into the stock market.
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Chart 8
SHANGHAI COMPOSITE SHOWS RELATIVE STRENGTH ... Strength in stocks started in Asia with all but one of the major Asian indices moving higher. Economic reports showing strength in Chinese manufacturing spurred the bulls. The Australian All Ords Index ($AORD) led the way with a 2% gain to 4527. Chart 9 shows the All Ords Index reversing in the 50-62% retracement zone and moving higher the last few days. The index broke above the wedge trendline on Monday and moved above 4500 on Wednesday.
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Chart 9
In an interesting twist, the Shanghai Composite ($SSEC) was the exception today with a .60% decline to 2623. Despite weakness on Wednesday, chart 10 shows the Shanghai Composite leading the S&P 500 over the last few months. The price relative at the bottom of the chart shows the performance of the Shanghai Composite relative to the S&P 500. Chinese stocks underperformed US stocks into mid July and outperformed from mid July until now. On the price chart, the index surged in July and remained flat throughout August. This is in stark contrast to the S&P 500, which declined rather sharply in August. The Shanghai Composite formed a flat consolidation with support at the August low and resistance at the August high. The direction of the break will trigger the next chart signal. A break above 2700 would signal a continuation higher and target a move to the next resistance zone around 2900-3000. Chart 11 shows weekly prices with this resistance zone.
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Chart 10
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Chart 11
EUROPEAN INDICES SURGE OVER 2%... Modest strength in Asia translated into serious strength in Europe. All of the major European indices were up 2% of more on the day. It is quite impressive to see stock indices around the world partake in an advance. The French CAC 40 ($CAC) surged around 3.5%, the German DAX ($DAX) was up over 2.50% and the Netherlands Index ($AEX) advanced over 2.5%. Chart 12 shows the German DAX breaking above Mondays high with a surge above 6050. Notice that the index found support near the June-July lows. Chart 13 shows the French CAC 40 surging above 3550 and breaking a couple of resistance levels in the process. Chart 14 shows the Netherlands Index surging off support with a move above 320. Like many indices, the AEX has been range bound since May and todays surge off support keeps this range alive. The swing within the range is now up.
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Chart 12
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Chart 13
