RUSSELL 2000 ETF STALLS WITH CHOPPY RANGE -- LONG-TERM RATES IGNORE QE2 AND CONTINUE MOVING HIGHER -- LONG BOND ETF BREAKS KEY SUPPORT LEVEL -- RISING RATES LIFT THE DOLLAR FOR 2ND DAY -- EUROSTOXX INDEX SHOWS RELATIVE WEAKNESS
RUSSELL 2000 ETF STALLS WITH CHOPPY RANGE... Link for todays video. Since moving above 71 on October 13th, trading in the Russell 2000 ETF (IWM) has turned quite choppy with a trading range the last few weeks. Chart 1 shows IWM with a sharp advance from 59 to 71. The ETF was up some 20% with the run from late August until mid October. There have been many attempts to break above 71, but none have held on a closing basis. Even though IWM is stalling, it has yet to break down and actually reverse the 10 week uptrend. This means the bulls are still in control. The ETF established support at 69 with two lows last week. A move below this level would reverse the 10 week uptrend and call for a deeper correction.
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Chart 1
The Commodity Channel Index (CCI) reflects the flat trading of the last 2-3 weeks. Momentum oscillators fluctuate around a centerline, which separates upside momentum from downside momentum. MACD revolves around 0, RSI around 50 and the Stochastic Oscillator around 50. CCI oscillates around the 0 line. In general, momentum favors the bulls when these oscillators are above their centerlines and the bears when below. Momentum oscillators gravitate towards their centerlines during trading ranges. After all, momentum flattens during a trading range. Notice that CCI has been positive since the first week of September. With the range over the last 2-3 weeks, CCI is trading at its lowest level since early September, but still positive. A move into negative territory would turn momentum bearish and could be used to confirm a support break in IWM.
LONG-TERM RATES CONTINUE MOVING HIGHER... Despite the prospects of QE2 and low interest rates from the Fed, the long end of the yield curve continues moving higher. This is perhaps one of the most significant developments over the last few weeks. Bill Gross of Pimco recently chimed in on the Fed and QE2. Gross likened QE2 to a big Ponzi scheme and suggested that this initiative would mark the high in the bond market. Gross is not just any bond guru. He just happens to run the biggest bond fund in the world. Price action in the market seems to bear this out. Chart 2 shows the 30-year Treasury Yield ($TYX) forming a higher low in early October, breaking above its April trendline and moving above 4% today (40 on the chart). The indicator window shows RSI breaking out of its bear range with a move above 60 this month. Notice that RSI hit resistance in the 50-60 zone from June to September. Not any more. With RSI now in bull mode, the 40-50 zone now marks support for the 30-year Treasury Yield. Chart 3 shows the 10-year Treasury Yield ($TNX) breaking its April trendline with a surge over the last two days. Yesterday, John Murphy featured the 10-year Treasury Yield as it reached support from the March 2009 lows.
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Chart 2
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Chart 3
LONG BOND ETF BREAKS KEY SUPPORT LEVEL ... Chart 4 shows the 20+ year Bond ETF (TLT) breaking below support from its September low. Because bonds move inverse to interest rates, a low in interest rates translates into a high for bonds. The bond ETF peaked in late August, which marked the most recent low in the stock market. After this peak, TLT formed a lower high in early October and broke support with a sharp decline the last two days. A downtrend is defined with a lower high and a lower low. TLT is now down over 2% in the last two days. Rick Santelli is probably going nuts over this one! A little pennant formed just before the break and TLT broke pennant support as well. The next support zone is around 97. Chart 5 shows weekly candlesticks and the Commodity Channel Index (CCI) moving into negative territory for the first time since April.
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Chart 4
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Chart 5
RISING RATES LIFT THE DOLLAR... The two day surge in bond yields lifted the Dollar for the second time in as many weeks. Chart 6 shows the US Dollar Fund (UUP) surging above 22.50 last week, but quickly falling back. The green back moved back above 22.50 with a sharp advance the last two days. Technically, UUP remains short of even a short-term breakout. First resistance is set at 22.75 from last weeks high. After this level, broken support turns into resistance around 23.25-23.50. A further rise in bond yields would likely kept a bid in the Dollar. Also notice that MACD turned up last week and remains above its signal line as momentum improves.
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Chart 6
The Euro represents the inverse of the Dollar. Keep in mind that the Euro accounts for over 55% of the US Dollar Index ($USD) and the US Dollar Fund. Chart 7 shows the Euro Currency Trust (FXE) hitting resistance at 140 this month and declining sharply the last two days. As you can see from this chart, things can change quickly in FOREX. The Euro was down over 12% during the sovereign debt crisis, but recovered quickly with 11% advances in the summer and autumn. Thats three 10+ percent moves in the last seven months.
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Chart 7
EUROSTOXX INDEX SHOWS RELATIVE WEAKNESS ... The DJ Euro Stoxx 50 ($STOX5E) is an index based on 10 European countries. France and Germany are by far the biggest components, weighing 35.8% and 28.5%, respectively. The index also includes Spain (14.5%), Italy (9.8%), The Netherlands (5.6%) and four smaller countries. The German DAX Index ($DAX) surged to new 52-week highs the last two weeks, but the French CAC Index ($CAC) remains well below its April highs, which explains the chart below. Chart 8 shows the DJ Euro Stoxx 50 ($STOX5E) with a large rising wedge that remains well below its April high. The overall trend since May is clearly up, but the index has not gone far since first moving above 2750 in mid June. Higher highs formed in August and October, but these highs were not that much higher than the June high. Relative to the S&P 500, the index started lagging in mid September and is clearly underperforming the US. Broken resistance from the September highs turns into the first support level to watch for signs of trouble. Trouble, what trouble? Greece has been reappearing in the news lately and chart 9 shows a continuation head-and-shoulders pattern taking shape for the DJ Greece Index ($GRDOW). Chart 10 shows the DJ Ireland Index ($IEDOW) consolidating below its last support break. A break above the September-October highs is needed to reverse this downtrend.
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Chart 8
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Chart 9
