STOCKS STALL AFTER BREAKOUTS -- NASDAQ HOLDS ABOVE RESISTANCE BREAK OUT -- BANKING AND HOUSING ETFS COULD HOLD THE KEY -- OIL SURGES OVER 2% TO CHALLENGE RESISTANCE -- ENERGY SPDR CHALLENGES SUMMER HIGHS -- OIL AND GAS E&P ETF BREAKS FLAG RESISTANCE
STOCKS STALL, BUT NO SIGNS OF WEAKNESS YET... Link for todays video. Stocks finished mixed on Wednesday with large-caps edging lower, small-caps edging higher and the Nasdaqs finishing fractionally lower. Chart 1 shows the NY Composite ($NYA) stalling around 7300 on Wednesday. The overall trend is clearly up with a higher low in late August and a higher high in September. Since moving above the August highs around 7200, the index has stalled the last several days. Stalling is not the same as weakness. At this point, stalling represents a rest within the ongoing uptrend. There are swings visible on the chart and marked with StochRSI. A surge above .80 signals the start of an upswing, while a plunge below .20 signals the start of a downswing. The indicator is not immune to whipsaws, but it can warn us of a shift in short-term momentum. Notice that StochRSI just dipped below .20 last week and quickly recovered (blue arrow). At this point, another dip below .20 and a support break at 7100 would reverse the current upswing. This would call for a correction within a bigger uptrend. StochRSI is the Stochastic Oscillator applied to RSI, which makes it an indicator of an indicator. It is volatile and best suited for short-term trading (1-4 weeks).
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Chart 1
NASDAQ HOLDS ABOVE RESISTANCE BREAK OUT... Chart 2 shows the Nasdaq with StochRSI. On the price chart, the index broke above resistance from the July highs and broken resistance turned into support around 2300. Notice how the index pulled back last week and then bounced off this level on Friday. First support is now based on last weeks low. StochRSI surged above .80 the first day of September and has held above .50 the entire month. With StochRSI for the NY Composite dipping below .20 last week, we can say at the Nasdaq is showing stronger short-term momentum than the NY Composite. A plunge below .20 in StochRSI for the Nasdaq would signal a change in short-term momentum. A confirming support break at 2300 would argue for at least a correction of the September surge. The bulls remain in control as long as short-term support hold and we should expect the trend to continue until a reversal is signaled.
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Chart 2
BANKING AND HOUSING ETFS COULD HOLD THE KEY... The next leg up may be decided by the Regional Bank SPDR (KRE) and the Homebuilders SPDR (XHB). The technology, consumer discretionary, industrials and healthcare sectors led the market higher in September. While leadership from four big sectors is certainly enough to keep the market buoyant, it would be encouraging to see breakouts from a couple of other key groups. Chart 3 shows the Regional Bank SPDR surging in early September and then trading flat the last three weeks. While the S&P 500 continued higher the last three weeks, KRE lagged by trading flat. Relative weakness in this key group remains a concern. A break above consolidation resistance at 23 would be quite positive for the market overall. Watch consolidation support for a break the other way.
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Chart 3
Chart 4 shows the Homebuilders SPDR breaking flag resistance and testing double bottom resistance. Notice that the ETF formed two lows around 13.5-14 in July and August. The intermittent high at 16 marks resistance for a possible double bottom. Based on the flag breakout, a resistance break at 16 is expected. However, the ETF did not hold the first flag breakout and has not followed through on the second flag breakout. The price relative is also flat as XHB performs in line with the market. Look for the price relative to break its September highs and the ETF to break 16 for a sign that housing stocks are poised to move higher. Failure at the summer high and a break below the flag low would be bearish.
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Chart 4
OIL SURGES OVER 2% TO CHALLENGE RESISTANCE... An unexpected decline in fuel supplies spurred the bulls into action in the oil market. The advance may have been short-covering, because oil has yet to break its September highs. Chart 5 shows the USO Oil Fund (USO) surging to a two week high with a move above 33.50 today. The blue trendline extending down from the May high marks the six month trend, which remains down. USO broke below the lower trendline of the June-July wedge (pink) with the August decline. Broken support turned into resistance around 34 with the September high. A small wedge formed in late September and the ETF broke above the upper trendline late last week. This is short-term positive, but still within a bigger downtrend. Look for follow through above the September high to produce a more meaningful breakout. With stocks strong and the Dollar weak throughout September, I am surprised to see USO still below its September high. The indicator window shows USO and SPY moving step-for-step until late August. Stocks moved higher in September, but oil traded flat. Continued strength in stocks would likely lead to an upside breakout in USO. Chart 6 shows the US Gasoline Fund (UGA) with similar characteristics.
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Chart 5
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Chart 6
ENERGY SPDR CHALLENGES SUMMER HIGHS... A surge in crude lifted the Energy SPDR (XLE) and the Oil Service HOLDRS (OIH). Chart 7 shows XLE breaking above the triangle trendline and challenging its June-August highs. Also notice that broken support from the March lows marks resistance in this area. Like the rest of the market, XLE has been swinging in volatile fashion since May. There have been seven 10% moves since May. That is more than one per month. The current swing is up with the late September lows marking support. The indicator window shows XLE along with the USO Oil Fund. XLE has been outperforming oil this month, this is an encouraging sign for oil. Relative strength in the Oil Service HOLDRS (OIH) is another positive sign. Chart 8 shows OIH breaking above its summer high and leading oil higher since June. OIH also started leading XLE higher in early September.
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Chart 7
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Chart 8
OIL AND GAS E&P ETF BREAKS FLAG RESISTANCE... In continuing with the oil theme, the Oil & Gas Exploration & Production SPDR (XOP) broke resistance with a surge above 42. Chart 9 shows XOP surging into early September and then forming a falling flag. The move over the last four days broke flag resistance and also surpassed the May trendline. This looks like a strong breakout. Notice that the May trendline is an internal trendline because I elected to draw through the June high. Technical analysis is a little art and a little science. Drawing through this high represents the art side of technical analysis. Viewer discretion is advised.
