SPY BREAKS ABOVE NECKLINE RESISTANCE -- BEARS MAY SEE AN ABC CORRECTION UNFOLDING -- IWM CHALLENGES DOUBLE BOTTOM RESISTANCE -- FINANCE AND SMALL-CAPS LEAD THE CHARGE -- SHANGHAI COMPOSITE LAGS IN SEPTEMBER -- HOMEBUILDERS SPDR FORMS BULL FLAG
SPY BREAKS ABOVE NECKLINE RESISTANCE... Link for todays video. There are some classic chart patterns at work in the major index ETFs. First, the S&P 500 ETF (SPY) has an inverse head-and-shoulders pattern that is being confirmed with todays advance. This pattern is also present in the Nasdaq 100 ETF (QQQQ) and the S&P MidCap 400 SPDR (MDY). The head-and-shoulders is a classic pattern normally associated with market tops. However, the inverse version marks a possible bottom with its long base. Chart 1 shows SPY declining below 106 in late May and then embarking on a long consolidation. This represents a base of sorts because the ETF established support around 104 with each shoulder. In addition, the ETF held above its July low as the right shoulder formed. This long base ended when SPY broke above its summer highs today. According to classical technical analysis, the height of the pattern is added to the breakout for an upside target. The height from the neckline to the head low is around 11 points and the breakout point is around 112, which targets further strength above the April high.
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Chart 1
Thats a mighty high price objective, especially considering that the ETF is already up almost 10% in the last four weeks. There are some concerns with this head-and-shoulders pattern. First, volume during the right shoulder advance has been low. In fact, SPY has yet to see above average volume this month. Ideally, volume should increase to validate the breakout surge. Second, the size of the pattern relative to the prior decline appears to be too big. With neckline resistance around 112, the pattern takes up well over 50% of the prior decline. Third, the breakout is only one day old. Even with these concerns, the positives currently outweigh the negatives. An immediate move back below 111 would throw cold water on this breakout and call for a re-evaluation.
BEARS MAY SEE AN ABC CORRECTION UNFOLDING... Just like economics, there are often two sides to every story (chart) in technical analysis. While the bulls see a clear breakout, the bears see an ABC rising wedge with retracement resistance close at hand. Chart 2 shows SPY with a zigzag advance that retraced just over 62% of the prior decline. Even though the ETF broke above its summer highs, this is normal for such corrective patterns. According to Elliott Wave theory, the ABC pattern marks a counter trend advance that is expected to fail. Wave C is often equal is Wave A, which suggests that Wave C could extend to 115 (104 + 11 = 115). With SPY currently around 114, it is close enough to its potential target. Even though this bearish setup may ultimately prevail, there is no arguing with the September trend (up). Again, last weeks gap marks the first important support level to watch around 111.
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Chart 2
IWM CHALLENGES DOUBLE BOTTOM RESISTANCE... In addition to these head-and-shoulders patterns, we also have a double bottom taking shape in the Russell 2000 ETF (IWM). Chart 3 shows IWM with two lows around 59 and an intermittent high around 67, which marks double bottom resistance. With a big surge today, the ETF is challenging resistance and a breakout would confirm the pattern. In fact, the ETF closed above the July-August closing highs today. In a sense, this confirms the double bottom. As with the inverse head-and-shoulders pattern, the height of the pattern is added to the breakout for an upside objective. This targets a move to around 75 (67 59 = 8, 67 + 8 = 75). This target is also above the April high. As with SPY, IWM is short-term overbought after a 13.5% advance in the last 4-5 weeks. Last weeks gap and consolidation mark first support at 64. A break below this level would put the double bottom back on ice (hold).
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Chart 3
FINANCE AND SMALL-CAPS LEAD THE CHARGE... A look at Mondays market summary page reveals leadership from small-caps with the Russell 2000 ($RUT) up almost 3% on Monday. All major indices were up, but only the Russell 2000 and S&P SmallCap 600 were up more than 2%. This is positive because it shows ahealthy appetite for risk. It is also positive for the US economy because small-caps are more dependent on the domestic economy than diversified large-caps. Looking at the sectors, the consumer discretionary and finance sectors led the way higher. This is also promising. As its name implies, the consumer discretionary sector is the most economically sensitive sector. Chart 4 shows the Consumer Discretionary SPDR (XLY) surging above 33 by advancing almost 2% on Monday. This is a big move on top of an already big move. XLY is up around 10% in the last four weeks. While the trends since early July and early September are up, the ETF is getting overextended on the upside. The bears probably see an ABC correction unfolding here too. As with SPY, last Mondays gap and the consolidation mark the first support zone around 32.2. The bulls are in good shape as long as XLY continues to outperform and gap-support holds.
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Chart 4
Chart 5 shows the Finance SPDR (XLF) with a double bottom taking shape over the last few months. With todays surge, the XLF is closer to resistance and a break above the summer highs would confirm the pattern. The upside target on a breakout would be to around 16.75. As with many indices and ETFs, last weeks gap and low mark the first support zone to watch. A move below last weeks lows would break short-term support and argue for at least a pullback.
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Chart 5
HOMEBUILDERS SPDR FORMS BULL FLAG... The homebuilders were part of the leadership group on Monday as the Homebuilders SPDR (XHB) surged over 3%. Chart 6 shows XHB forming a possible double bottom with support around 13.5-14. After surging off support in late August and early September, the ETF consolidated with a flat flag. These consolidations are bullish continuation patterns**. A break above last weeks highs would signal a continuation higher and target further strength above the July high. A move above the summer high would confirm the double bottom. The flag lows mark the first support level to watch for sign of trouble, especially if XHB does not break its summer high and remains in a bigger downtrend.
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Chart 6
LENNAR, PULTE AND TOLL BROTHERS SURGE... Within the homebuilding group, chart 7 shows Lennar (LEN) surging over 8% with big volume on Monday. Over the last four weeks, the stock is clearly one of the leaders with an advance in excess of 25%. LEN is fast approaching resistance from the July highs. Chart 8 shows Pulte (PHM) with a triangle consolidation over the last two months. A move above the September highs would break resistance and argue for higher prices. Chart 9 shows Toll Brothers (TOL) breaking above double bottom resistance in early September and holding this breakout with a surge off 18 today.
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Chart 7
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Chart 8
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Chart 9
SHANGHAI COMPOSITE LAGS IN SEPTEMBER... While the S&P 500 moved sharply higher in September, the Shanghai Composite ($SSEC) moved lower and showed relative weakness. This is a concern because of Chinas importance to the world markets and economy. Chart 6 shows the index surging in July and showing relative strength into August. The S&P 500 declined sharply in August, but the Shanghai Composite traded flat and held up quite well at the time. Relative strength did not translate into absolute strength as the Chinese ndex gave up its September gains with a decline the last four days. Notice that the price relative moved lower over the last four weeks. Overall, the index remains in a trading range with support around 2600 and resistance around 2700. Watch these boundaries for the next signal.
