BROKEN RESISTANCE TURNS FIRST SUPPORT FOR XLB, XLK AND XLP -- MEDIUM-TERM BONDS TURN LOWER -- GERMAN STOCKS LEAD EUROPE -- IRISH AND GREEK INDICES STILL SHOW RELATIVE WEAKNESS -- SPANISH AND PORTUGUESE INDICES BACK OFF RESISTANCE
BROKEN RESISTANCE TURNS FIRST SUPPORT FOR XLB, XLK AND XLP... Link for todays video. One of the basic tenets of technical analysis is that broken resistance turns into support. The inverse is also true. A resistance level represents an area of supply. A break above resistance signals that demand has overcome supply at this area. This previous area of supply now becomes an area to expect future demand (support). With the surge over the last few months, several ETFs have broken resistance and continued higher after their breakouts. These ETFs are clearly in bull mode, but getting ripe for a pullback or consolidation after extended runs. Broken resistance becomes one of the first places to expect support. Chart 1 shows the Materials SPDR (XLB) breaking resistance around 34 and continuing above 36. An outside reversal day formed on Tuesday, but there was no follow through on Wednesday. Broken resistance around 34 turns into the first support level to watch. Chart 2 shows the Technology SPDR (XLK) with broken resistance around 23.5-24. I also added the Fibonacci Retracements Tool to point out possible retracement support. Chart 3 shows the Consumer Staples SPDR (XLP) with broken resistance and the July trendline marking support in the 27.5-27.7 area.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
(click to view a live version of this chart)
Chart 3
MEDIUM-TERM BONDS HIT RESISTANCE... John Murphy pointed out weakness in the long bond on Tuesday. Some of this weakness was attributed to QE2 related inflationary pressures, the falling Dollar and rising commodity prices. We should watch to see if weakness at the long end of the curve expands to the middle of the curve. The yield curve for bills, notes and bonds extends as follows: 13 weeks, 6 months, 1 year, 2 year, 5 year, 7 year, 10 year, 20 year and 30 year. 13 weeks to 2 years is clearly at the short end of the curve. 20 and 30 years are at the long end. 7 and 10 years are in the middle of the curve. The placement of 5 years is debatable. In any case, the long end of the curve is the most sensitive to changes in interest rate policy or inflationary pressures. Moreover, the bond market typically leads the Fed. In other words, interest rates via the bond market will start moving higher well before the Fed hints at a change in interest rate policy. The scenario unfolding now is right out of Intermarket Analysis, the book by John Murphy. Bonds advance first. Stocks follow and commodities move higher at the latter stages of a bull market. Rising commodity prices eventually bring about inflationary pressures and this brings about a peak in bonds. Bonds start falling and interest rates start rising, which in turn leads to a peak in stocks.
Chart 4 shows the 7-10 Year Treasury ETF (IEF) hitting resistance from its October high and falling this week. The ETF has yet to break support, but a move below the October low would reverse the uptrend that has been in place since April. Chart 5 shows the 10-Year Treasury Yield ($TNX), which moves inverse to treasuries. $TNX broke the April trendline with a surge in October and the trendline extension turned into support with a bounce the last few days. A move above the September-October highs would complete a trend reversal. Murphy noted that the 30-Year Treasury Yield ($TYX) broke its 200-day moving average recently. A trend reversal in the 10-Year Treasury Yield would signal that rates are also rising in the middle of the curve.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
GERMAN STOCKS CONTINUE TO LEAD EUROPE... The Euro came under pressure over the last few days as investor concern turned towards debt levels in countries that make up peripheral Europe. Greece, Ireland, Portugal and Spain are part of this group. Concerns are clearly evident in the bond markets for these countries. 10-year Irish bond yields are trading at new highs, which means their bonds are at fresh lows. Comparable yields for Greek and Portuguese bonds are trading near their recent highs. Continued pressure on these bonds means investors are demanding a higher yield for higher risk. At some point, these doubts may filter into the Euro and their respective equity markets. US investors should be concerned because problems across the pond could affect US banks and possibly the economy. Europe is still a big trading partner. Also note that another round of European debt fears could push money into safe havens, like US Treasuries. The European bond markets have already voiced concern. European equities are the next area to watch. Chart 6 shows the German DAX ($DAX) breaking ascending triangle resistance and hitting fresh hits recently. German stocks are clearly strong. In fact, the DAX is the strongest European index.
(click to view a live version of this chart)
Chart 6
IRISH AND GREEK INDICES STILL SHOW RELATIVE WEAKNESS... Turning to peripheral Europe, we can see consolidations within downtrends for Greece and Ireland. Chart 7 shows the DJ Ireland Index ($IEDOW) breaking support this summer and then consolidating below this support break. Broken support turned into resistance in the low 180 area. A break above the Sep-Oct highs would be quite positive, but a move below the October lows would signal a continuation of the current downtrend. Notice that RSI is meeting resistance in the 50-60 zone. The bearish zone for RSI is 20-60. A break above this zone is needed to put momentum back with the bulls. Chart 8 shows the Athens General ($ATG) forming a symmetrical triangle over the last few month. These are continuation patterns. With the prior trend down, a break below triangle support would signal a continuation lower. Also notice that RSI is meeting resistance in the 50-60 zone.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
SPANISH AND PORTUGUESE INDICES BACK OFF RESISTANCE... Even though equities in Spain and Portugal performed well over the last six months, both indices ran into resistance and declined sharply the last 1-2 weeks. Chart 9 shows the Spanish Madrid General ($SMSI) retracing 62% of the summer advance and hitting resistance around 1130 the last three months. Also notice that RSI hit resistance in the 50-60 zone. With a sharp decline back below 1100, this index has failed at resistance and looks vulnerable to lower prices. Chart 10 shows the DJ Portugal Index ($PTDOW) surging all the way to its April high and then weakening over the last two weeks. The swing since May remains up, but a break below the May trendline would reverse this swing.
(click to view a live version of this chart)
Chart 9
