STOCHRSI TURNS BEARISH FOR THE NASDAQ -- RUSSELL 2000 BATTLES RESISTANCE BREAK -- FINANCE SPDR FORMS PENNANT AFTER SHARP DECLINE -- REGIONAL BANK SPDR STALLS NEAR CONSOLIDATION RESISTANCE -- ABC CORRECTIONS FOR THE XLI, XLY AND $TRAN
STOCHRSI TURNS SHORT-TERM BEARISH FOR THE NASDAQ ... A correction or consolidation period could be in store as the Nasdaq comes off overbought conditions in September. Chart 1 shows the Nasdaq surging around 13% in September and breaking above its summer high. With a 1.11% decline today, the index is about to test broken resistance, which turns into the first support zone to watch. For now, the breakout is holding and I am marking support around 2300-2325. A move below 2300 would break this first support zone and call for a deeper pullback.
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Chart 1
The indicator window shows StochRSI moving below .50 for the first time since early September. This line marks the midpoint for this momentum oscillator. Think of it as the 50 yard line. The offense (da bulls) has the edge when above 50, while the defense (da bears) has the edge when below 50. Momentum was bullish as StochRSI held above .50 from early September until late September. With stalling last week, the indicator moved below .50 and then broke below .20 with todays decline. Normally, a move below .20 is considered oversold, just as move a below 30 in RSI or 20 in the Stochastic Oscillator. However, dont forget that it takes above-average selling pressure to push an index into oversold territory. Just as in early August, this increase in selling pressure could signal the start of a short-term pullback or consolidation.
RUSSELL 2000 BATTLES RESISTANCE BREAK... The Russell 2000 edged above resistance in late September, but got cold feet and fell back over the last few days. Chart 2 shows resistance in the 670 area that stems from reaction highs going back to late May. There are at least three reaction highs marking resistance here. With the July-August lows, it is possible that a double bottom is taking shape. A decisive break above resistance would confirm this pattern and target a move towards the April highs.
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Chart 2
The Russell 2000 advanced from 590 to 680 in five weeks. A 15% move in such a short timeframe created a short-term overbought condition, which was confirmed by the Commodity Channel Index (CCI) moving above 100. As with StochRSI, a move to overbought levels shows above-average buying pressure and this initial move is not always bearish. In fact, notice how the indicator hovered around the 100 area for four weeks as the index continued higher. Zero marks the mid point for this momentum oscillator. The bulls have the edge as long as this indicator remains in positive territory. A move into negative territory would turn short-term momentum bearish. CCI(20) is a slower oscillator than StochRSI(14). This means it will generate few signals that StochRSI and these signals will later.
FINANCE SPDR FORMS PENNANT AFTER SHARP DECLINE... After a failure at resistance and sharp decline toward the end of September, the Finance SPDR (XLF) formed a pennant consolidation the last eight days. Chart 3 shows XLF breaking support at 14.50 and then stalling. Pennants are small continuation patterns that represent a rest after a sharp move. With the prior move down, the pennant favors a continuation of this decline. Also notice that the price relative remains in a clear downtrend as the finance sector continues to show relative weakness. A move below 14.25 would break pennant support and signal a continuation lower. Support from the summer lows would then mark the next target. Even though a continuation break lower is expected, we should also be ready for the unexpected. A break above the pennant high would be positive and argue for another assault on resistance.
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Chart 3
REGIONAL BANK SPDR STALLS NEAR CONSOLIDATION RESISTANCE... In addition to the finance sector, I am also watching a consolidation in the Regional Bank SPDR (KRE). Chart 4 shows KRE battling resistance around 23. In a way, the Regional Bank SPDR is holding up better than the Finance SPDR (big bank ETF). Notice that XLF is trading well below its September highs while KRE is still within striking distance of these highs. A choppy consolidation formed with support at 22 and resistance at 23. The ETF punched through resistance at least twice intraday, but failed to close above this key level. A close above 23 would signal a short-term breakout that would target a move towards the next resistance level around 25. The bears hold the edge until there is a breakout.
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Chart 4
ABC CORRECTIONS FOR THE INDUSTRIALS SPDR, CONSUMER DISCRETIONARY SPDR AND DOW TRANSPORTS ... There are a few ABC corrective patterns in play that warrant our attention. First, lets look at the theory behind these patterns. ABC corrections are zigzag patterns from Elliott Wave theory. After a decline, an ABC correction forms as a counter-trend rally that retraces a portion of the decline. This retracement often recoups 38-62% of the prior loss. These are levels based on Fibonacci Retracements. As a corrective pattern, a peak is expected below the prior high and the subsequent decline is expected to exceed the prior low. Yes, these patterns are bearish.
Chart 5 shows the Consumer Discretionary SPDR (XLY) with a potential ABC correction underway. First, there is the sharp decline from late April to early July. Second, the subsequent zigzag advance traced out three legs (ABC). Third, Wave C is running into resistance near the 62% retracement mark. Fourth, resistance in this area is confirmed by the upper trendline of the parallel channel. For trend followers, the trend is clearly up with the higher low in late August and the break above the summer highs. It should also be noted that this pattern is potential because Wave C remains in an uptrend. Short-term support is marked at 32.5 and a break below this level would be the earliest validation signal for the ABC correction. Final validation would come with a break below the channel trendline and the late August low. The bulls are still in charge of this chart. I am showing the ABC correction has something to look for that would start to prove the bullish argument otherwise. Charts 6 and 7 show the Industrials SPDR and Dow Transports with similar characteristics.
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Chart 5
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Chart 6
