IWM HITS RESISTANCE AND STALLS -- SETTING FIRST SUPPORT LEVELS FOR DIA AND QQQQ -- SEMIS BATTLE NEW RESISTANCE ZONE -- INTC AND AMAT SHOW RELATIVE WEAKNESS -- AMTL AND CY SHOWS RELATIVE STRENGTH -- EURO UNDER PRESSURE AS SOVEREIGN DEBT ISSUES RETURN
IWM HITS RESISTANCE AND STALLS ... Link for todays video. Despite leading the market lower the last few months, small-caps led the market higher over the last two weeks. However, chart 1 shows the Russell 2000 ETF (IWM) running into resistance around 64 over the last few days. Resistance in this area stems from broken support and the April trendline. There is also a gap down the second week of August. After a surge from 59 to 64 in eight days (8.4%), the ETF was short-term overbought last week and ripe for a pullback or a consolidation. Technically, the bigger trend remains down as prices move from the upper left to the lower right on the chart. A little follow through above this first resistance level is needed to keep this upswing alive and challenge bigger resistance around 67. The indicator window shows IWM underperforming SPY since May. However, the price relative did turn up over the last two weeks. Again, a little follow through is needed to break the May trendline and show some serious relative strength.
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Chart 1
SETTING FIRST SUPPORT LEVELS FOR DIA AND QQQQ... The charts for the Dow SPDR (DIA) and the Nasdaq 100 ETF (QQQQ) are quite different over the last few months, but both share the same support zones to watch in the coming days. Chart 2 shows DIA with a move above its June high in early August and a substantially higher low in late August. DIA broke above channel resistance last week and the broken resistance zone around 101 turns into the first support zone to watch. A strong breakout should hold. Like many indices, DIA became short-term overbought after a 4% surge last week. Some sort of pullback or consolidation can be expected after such a big move. A shallow pullback would be more bullish than a deep pullback. A pullback that extends past the breakout at 101 would question bullish resolve.
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Chart 2
Chart 3 shows QQQQ with a triangle taking shape over the last few months. QQQQ formed a lower high in early August and a higher low in late August. The swing within this triangle is up with last weeks breakout surge. Broken resistance around 44 becomes the first resistance level to watch. A strong breakout should hold and a move below 44 would question this breakout.
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Chart 3
SEMIS BATTLE NEW RESISTANCE ZONE... A basic tenet of technical analysis is that broken support turns into resistance. Chart 4 shows the Semiconductors HOLDRS (SMH) breaking support in August and this support zone turning into a resistance zone. Notice how support around 25.5-26 turned into resistance this week. We can now mark key resistance with last weeks high. A move above this level is needed to reverse the seven week slide. John Murphy and I wrote about relative weakness in semiconductor stocks during August. With a pullback from broken support over the last two days, semis continue to show relative weakness. The indicator window shows the price relative, which compares SMH performance to the S&P 500 ETF (SPY). This indicator peaked in mid July and declined steadily over the last 7-8 weeks. Relative weakness in this key groupd a negative for the technology, Nasdaq and market overall.
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Chart 4
INTC AND AMAT SHOW RELATIVE WEAKNESS ... Intel (INTC) is the single largest component in the Semiconductors HOLDRS. Chart 5 shows the stock falling over 1% after a downgrade today. Falling on bad news is not a good sign. INTC broke support in August with a series of gaps. After this weeks decline, the stock established resistance with last weeks high. Chart 6 shows Applied Materials (AMAT) plunging over 2% on Wednesday. As with INTC, the stock established resistance with last weeks high. At the rate these two are falling, they will soon be in the S&P Value Index.
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Chart 5
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Chart 6
ATML AND CY SHOWS RELATIVE STRENGTH... While the titans Intel and Applied Materials move south, a couple of smaller semiconductor stocks are moving higher and showing relative strength. Chart 7 shows Cypress Semiconductor (CY)with a double bottom taking shape over the last few months. Notice how the stock surged from support to resistance with big volume the last two weeks. Chart 8 shows Atmel (ATML) surging above its August high this week. In fact, the stock hit a new 52-week high this week. While it looks short-term overbought after the two week surge, there is no denying relative strength.
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Chart 7
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Chart 8
EURO UNDER PRESSURE AS SOVEREIGN DEBT ISSUES RETURN... Technical analysts are not so much interested in the news, but rather the markets reaction to the news. In its simplest form, an advance in the face of bad news is bullish. The converse is also true. A decline in the face of good news is bearish. The news out of Europe was not positive today, but stocks managed to move higher and hold their gains. The cost of insuring Irish credit default swaps hit an all time high on Wednesday. Bond spreads remain wide elsewhere on the continent. Portuguese bonds yield around 3.5% more than German bonds and Greek bonds yield over 9% more than German bonds. Even though US stocks held up well, I think it is important to keep an eye on Europe and the Euro in the coming days and weeks. Stocks and the Euro have been positively correlated in 2010 as both rose and fell together throughout the year. Strength in the Euro means the risk-on trade is favored. Weakness means the risk-off trade takes precedence. Chart 9 shows the Euro ETF (FXE) getting hit hard in August and then forming a rising consolidation the last two weeks. FXE was hit hard on Wednesday, but managed to firm today. I am watching this weeks lows for signs of a break that would signal a continuation lower. Chart 10 shows the DB Dollar Bullish ETF (UUP) forming a pennant over the last few weeks. A break above this weeks high would signal a continuation of the August surge. MACD has flattened over the last few days.
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Chart 9
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Chart 10
Chart 11 shows the Euro Stoxx 50 Index ($STOX50) bumping up against resistance from the August high. The trend since late May remains up as the index works its way higher within a rising wedge. Resistance around 2550 is confirmed by the 62% retracement mark. There are no signs of material weakness right now, but we should keep an eye on this European barometer in the coming days and weeks.
