MATERIALS SECTOR LEADS WITH A 52-WEEK HIGH -- WEAK DOLLAR AND STRONG CHINA BOOSTS BASE METALS -- NETWORKING STOCKS POWER TECHS HIGHER -- CISCO AND TELLABS LEAD NETWORKING GROUP -- SEMICONDUCTOR HOLDRS CHALLENGES SUMMER HIGHS
MATERIALS SECTOR LEADS WITH A 52-WEEK HIGH... Link for todays video. The Basic Materials SPDR (XLB) continues to show leadership with a move above its October high today. Chart 1 shows XLB meeting resistance around 34.5 the last two weeks and then surging above 35 to forge a 52-high. The overall trend is clearly up, but XLB is up some 15% from its August lows and getting overextended. The late October lows mark the first support level to watch. Below this level, broken resistance and the July trendline mark support around 32-32.50.
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Chart 1
WEAK DOLLAR AND STRONG CHINA BOOSTS BASE METALS ... Chart 2 shows the Base Metals ETF (DBB) recording a 52-week high along with the Basic Materials SPDR today. The two charts are remarkably similar. Bloomberg reports that copper recorded a 27-month high today. The indicator window shows DBB along with the Euro Currency Trust and the S&P 500 ETF. All three have been moving higher since the end of August.
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Chart 2
Todays advance in base metals was helped by weakness in the Dollar and strength in the Shanghai Composite. Chart 3 shows the US Dollar Fund (UUP) moving modestly lower on Monday. The trend is clearly down, but MACD turned up the last few days. Look for a break above resistance at 22.75 to call for an oversold bounce towards broken support. A bounce in the greenback would likely weigh on metals and the materials sector. Chart 4 shows the Shanghai Composite ($SSEC) surging above 3000 today. The index is up over 20% since early July. A rebound in Chinese equities points to a rebound in the Chinese economy, which would signal an increase in demand for raw materials.
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Chart 3
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Chart 4
NETWORKING STOCKS POWER TECHS HIGHER... Techs got a boost with nice gains in networking stocks. The Networking iShares (IGN) gained over 2.5% and the old Networking Index ($NWX) was up around 3%. Chart 5 shows IGN breaking flag resistance with a gap above 30 today. The ETF is now closing in on the April high. Notice that broken resistance turned into support around 28.5-29 as the flag fell. Falling flags are bullish continuation patterns. This breakout signals a continuation of the September advance and projects further strength above the April highs.
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Chart 5
CISCO AND TELLABS LEAD NETWORKING GROUP... Chart 6 shows Cisco (CSCO) breaking the May trendline this month. Even though the stock closed well off its higher, it has been moving steadily higher since late August. The August trendline and last weeks low mark first support just below 23. Chart 7 shows Tellabs (TLAB) breaking triangle resistance and exceeding its late September high. In contrast to Cisco, the stock closed strong and recently broke resistance.
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Chart 6
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Chart 7
SEMICONDUCTOR HOLDRS CHALLENGES SUMMER HIGHS... Friday I wrote about the Semiconductor HOLDRS (SMH) as a lagging group because the ETF had yet to break its summer highs. Chart 8 shows SMH making up for lost ground with a break above the June-July highs. Todays close was not strong though and resistance from these summer highs remains. SMH formed a falling flag the last two weeks and broke flag resistance the last two days. This argues for a resistance break. The swing since late August remains clearly bullish with the late October low marking support.
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Chart 8
TXN HITS NEW HIGH AS AMD FORMS CONSOLIDATION... Within the group, chart 9 shows semiconductor equipment maker Novellus (NVLS) breaking short-term resistance with a surge over the last two days. Chart 10 shows Texas Instruments (TXN) breaking flag resistance and recording a new 52-week high. TXN is clearly one of the leaders in this group. Chart 11 shows Advanced Micro Devices (AMD) at a critical juncture. After the September surge, the stock consolidated just below trendline resistance. A move above 7.50 would break consolidation resistance and clear the trendline.
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Chart 9
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Chart 10
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Chart 11
CITIGROUP AND BANK OF AMERICA GO THEIR SEPARATE WAYS... Last week I showed the Finance SPDR (XLF) in a consolidation that extends back to mid September. Chart 12 shows XLF trading between 15 and 14.2 since mid September. A break from this range will provide the next directional signal and this signal will likely have ramifications for the market overall. At this point, XLF failed at resistance with the 14-Oct gap. Combined with relative weakness overall, the odds favor a break to the downside.
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Chart 12
Two money center banks capture the current divide within the finance sector. Chart 13 shows Citigroup (C) bouncing off support from the June-July lows in August and moving to resistance the last few weeks. With a slight ascending triangle is taking shape, a break above the July-October highs would signal a continuation higher and project further strength towards the April highs. The indicator window shows the price relative (C:$SPX ratio) contracting the last few months. An upside breakout would be positive. Citibank was added to the Goldman Sachs conviction buy list today.
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Chart 13
Market sentiment towards Bank of America (BAC) is at the other end of the spectrum. Chart 14 shows BAC peaking in mid September, forming a lower high in early October and breaking down over the last two weeks. The stock is down some 18% in nine days. The price relative moved to a new low as BAC continues to underperform. These two banks may have a lot in common, but their charts suggest they do not share a common outlook. Such discrepancies could keep the Finance SPDR range bound.
