IWM FORMS INSIDE DAY IN OVERBOUGHT TERRITORY -- FINANCE SECTOR BOUNCES OFF CONSOLIDATION SUPPORT BROKER-DEALER ETF LEAD FINANCE WITH RESISTANCE CHALLENGE -- SCHWAB AND CME BREAK OUT AS GOLDMAN CHALLENGES RESISTANCE -- OIL AND GASOLINE ETFS FORM BULL FLAGS
IWM FORMS INSIDE DAY IN OVERBOUGHT TERRITORY... Link for todays video. The Russell 2000 ETF (IWM) is up around 20% in the last eight weeks and overbought by most measures. Even though the trend since early September remains up, the odds of a correction or a pullback increase with each passing day. Chart 1 shows IWM breaking above resistance in late September. The ETF continued right on above 70 and then stalled the last three days. After a black candlestick on Friday, the ETF is tracing out an inside day on Monday. Inside days are exactly what they sound like. All trading is within the high-low range of the previous day. These 2-day patterns signal indecision that can sometimes foreshadow a short-term reversal. They are similar to harami, which are candlestick patterns. Last weeks gap marks the first support level to watch. A break below support would argue for a deeper pullback towards broken resistance around 67.
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Chart 1
The indicator window shows the Commodity Channel Index (CCI) hovering around 100 since early September. This is a classic case of a security becoming overbought and remaining overbought. Looking at CCI movements the last two months, there appears to be an overbought zone above +50 (green dotted line). After an initial move above 100, CCI should be considered both overbought and bullish as long as it remains above +50. The initial move above 100 shows strong upside momentum. The ability to subsequently hold above 50 reflects continued upward pressure. A move below 50 would weaken momentum enough to start a correction. Chart 2 shows the Dow Industrials SPDR (DIA) with similar characteristics.
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Chart 2
FINANCE SECTOR BOUNCES OFF CONSOLIDATION SUPPORT... With a positive reaction to earnings from Citibank, the Finance SPDR (XLF) bounced off short-term support on Monday. It may be too little too late though. Chart 3 shows the Finance SPDR hitting resistance at 15 for the umpteenth time since summer and falling back sharply last week. XLF gapped down on Thursday and continued lower on Friday. This move reinforces resistance at 15. A move above 15 would fill the gap, break resistance and be quite bullish. It hasnt happened yet though. As the chart stands, resistance is holding and the sector shows relative weakness. The indicator window shows the price relative, which shows the performance of XLF relative to the S&P 500. This indicator hit a new low on Monday, indicating relative weakness and underperformance in this key sector. While the market has performed just fine without help from the finance sector, pervasive relative weakness in this key group remains a concern going forward.
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Chart 3
Chart 4 shows weekly candlesticks with a potential head-and-shoulders pattern evolving over the last 14 months. This is one long consolidation. After a surge at the end of August, the ETF moved into a trading range with support at 14.10-14.20 and resistance at 15. XLF has been stuck in this range for seven weeks now. As noted before, the direction of this break will have ramifications beyond the finance sector. Given the failure at resistance and relative weakness, the odds favor a downside break. This would setup an even more important support test around 13.30-13.50, which marks neckline support for the head-and-shoulders pattern.
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Chart 4
BROKER-DEALER ETF LEADS FINANCE WITH RESISTANCE CHALLENGE... Even though the big money-center banks dominate the finance sector, it can be subdivided into smaller industry groups that represent different areas. Broker-dealers, insurers, regional banks, REITs and S&Ls are all part of this sector. Chart 5 shows the Broker-Dealer iShares (IAI) challenging resistance from July-August high. The ETF surged off support in late August, consolidated for three weeks and started moving higher again in early October. A break above resistance would be bullish for this key industry group.
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Chart 5
The indicator windows show Williams %R (14) and the Fast Stochastic Oscillator (14). Except for the scales on the right, these two indicators are virtually identical. Both momentum oscillators became overbought over the past few weeks. Overbought is currently a show of strength, not weakness, After all, it takes buying pressure to produce an overbought reading. Will this current overbought reading last several weeks, such as in August 2009 (red oval). Or, will this overbought reading last just a few weeks, such as April 2010 (red circle). It is hard to tell, but we can define post-overbought make-or-break levels for these momentum oscillators. During the extended overbought reading from mid July to mid October 2009, these oscillators fluctuated near their overbought levels (-20 for Williams %R and 80 for the Stochastic Oscillator). Momentum is both overbought and bullish as long as these oscillators remain near overbought levels. The green dotted lines mark a make-or-break level for overbought conditions (-30 for Williams %R and 70 for the Stochastic Oscillator). Should these oscillators move below these levels, post-overbought strength would cease and IAI would then be vulnerable to a decline.
SCHWAB AND CME BREAK OUT AS GOLDMAN CHALLENGES RESISTANCE... Key stocks in the Broker-Dealer iShares include Goldman Sachs (GS), Morgan Stanley (MS), CME Group (CME) and Charles Schwab (SCHW). Goldman Sachs remains one of the strongest. Chart 6 shows Goldman challenging resistance near the August-September highs. Resistance in the 157 area also stems from a 50% retracement of the April-July swoon. The pattern since early August looks like a cup-with-handle and a rim breakout would be bullish. Chart 7 shows the CME Group (CME) breaking above flag/wedge resistance and the early October high. This breakout signals a continuation of the prior surge. CME Group runs the NYMEX and the COMEX futures exchanges. Chart 8 shows Charles Schwab (SCHW) breaking the May trendline and working its way higher since early September. The stock surged the last two days with a move above 14.50 for the first time since mid August. A rising channel of sorts has taken shape. The bulls are in good shape as long as the early October low holds.
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Chart 6
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Chart 7
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Chart 8
OIL AND GASOLINE ETFS FORM BULL FLAGS... Even though stocks and the Dollar were relatively flat, oil and gasoline surged on news of continued strikes in France. Sounds like a flimsy excuse so we best check out the charts for a dose of reality. Chart 9 shows the USO Oil Fund (USO) surging above resistance in late September and then consolidating the last two weeks. A falling flag has taken shape and this is a bullish continuation pattern. After the surge from 32.2 to 36.6, USO became short-term overbought as the August high came into view. This flag alleviated the overbought conditions, but the ETF has yet to signal a continuation of the late September surge with a breakout. A move above last weeks high would do the trick. Broken support around 38 would then mark the next resistance level to watch. Chart 10 shows the US Gasoline Fund (UGA) forming a flag at resistance around 36.
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Chart 9
