BOND ETF TESTS KEY SUPPORT LEVEL -- INFLATION-INDEXED BOND ETF BREAKS SUPPORT -- NET NEW HIGHS INDICATORS REMAIN IN BULL MODE
BOND ETF TESTS KEY SUPPORT LEVEL... Link for todays video. The 7-10 year Bond ETF (IEF) is testing its October low with weakness on Monday. Chart 1 shows IEF hitting resistance around 100 twice since early October. A small double top is taking shape with support at 97.52, which marks the 27-October low. While this pattern may seem small, a support break could foreshadow a sizable decline. The February-April consolidation was about the same size and the late April resistance break foreshadowed a 10+ percent advance. A signal is a signal. According to Dow Theory, neither the length nor the duration of a move can be forecast. The best chartists can do is identify a reversal and ride that reversal until proven otherwise. Chart 2 shows the 20+ year Bond ETF (TLT) for reference.
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Chart 1
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Chart 2
John Murphy noted earlier today that yields are moving higher in spite of QE2 and the Feds buy program. So why are bonds falling and yield rising? First, QE2 is designed to bring inflation in line with the Feds target, which is higher. Second, the CRB Index ($CRB) has been rising since late May and the advance accelerated in September. Prices for raw materials are rising. Third, retail sales gained for the fourth month in a row. Strength in the economy is not surprising given the strength we have seen in the stock market since late August. The first two items suggest an increase in inflationary pressures. The third, retail sales and the stock market, point to economic strength. One thing is sure at this point. Bonds do not see any deflation down the road. Bonds would be rising and rates would be falling if deflation were the concern.
INFLATION-INDEXED BOND ETF BREAKS SUPPORT... What a difference two weeks makes. Chart 3 shows the Inflation-Indexed Bond ETF (TIP) attempting a pennant breakout with two surges above 112. These surges occurred on the open and TIP closed below the pennant trendline each day. The breakout failures evolved into a support break as the ETF broke below its mid October lows and filled the early October gap. Even though the April trendline is still holding, the failed breakout and support break look awfully bearish. The indicator window shows the Inflation-Indexed Bond ETF relative to the 7-10 year Bond ETF (IEF). TIP underperformed from May to August, but outperformed in September-October. The price relative remains above the green trendline and trendline break would signal relative weakness in the Inflation Indexed Bond ETF. Even though these bonds are supposed to be protected against inflation, they are still bonds. Bonds in general decline as inflationary pressures heat up. While TIP might not be immune to general weakness in bonds, it should hold up better than normal bonds.
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Chart 3
NET NEW HIGHS INDICATORS REMAIN IN BULL MODE... The Net New Highs indicators are considered medium or long-term breadth indicators. Based on prior moves, signals generated from these indicators last one month or longer. Some signals last a few months, while others can extend several months. No two signals are exactly the same. As its name implies, it takes at least a year for a stock to forge a new 52-week high. The same is true for new lows. Therefore, it takes a sustained move in one direction or another to affect these indicators.
There are two high-low indicators to watch. First, there is Net New Highs, which equals new highs less new lows. This indicator fluctuates above/below the zero line. Positive readings favor the bulls, while negative readings favor the bears. Second, there is the Cumulative Net New Highs line. This indicator rises when Net New Highs are positive and falls when they are negative. A rising line favors the bulls, while a falling line favors the bears.
Roughly speaking there have been three trends since March 2009. First, the indicators favored the bulls from May 2009 until April 2010. After the downturn in April, the indicators favored the bears from May to August (Nasdaq) and May to mid July (NYSE). The Nasdaq indicators have been bullish since September, while the NYSE indicators have been bullish since late July.
Chart 4 shows the Nasdaq Cumulative Net New Highs line currently rising and Nasdaq Net New Highs ($NAHL) in positive territory. Net New Highs plunged from above 300 to 27 over the last few weeks, but remain in positive territory overall. A move into negative territory would show weakness that could signal the start of a pullback or consolidation period. Note that it takes a few negative readings to push the Cumulative Net New Highs line below its 10-day EMA. This line is considered rising as long it holds above its 10-day EMA.
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Chart 4
Chart 5 shows the NYSE Cumulative Net New Highs line also rising currently and NYSE Net New Highs ($NYHL) in positive territory. Net New Highs were hit hard with a plunge from above 500 to 27 over the last few weeks. Despite such a hard hit, we have yet to see a dip into negative territory. Negative Net New Highs would be the first sign of weakness. This would indicate that new lows outnumber new highs. Sustained negative readings would then push the Cumulative Net New Highs line lower and into bear mode.
