BROKEN RESISTANCE MARKS FIRST SUPPORT FOR SPY -- SMALL AND MID CAPS OUTPERFORMING LARGE-CAPS -- GOLD REMAINS STRONG DESPITE CURRENCY FLUCTUATIONS -- EURO GETS OVERSOLD BOUNCE AS DOLLAR CORRECTS -- CUMULATIVE NET NEW HIGHS LINE REMAINS IN BULL MODE
BROKEN RESISTANCE MARKS FIRST SUPPORT FOR SPY... Link for todays video. Point & Figure charts are straight-forward charts that focus exclusively on price action. Columns of Xs appear during an advance. Columns of Os appear during a decline. Nothing appears when prices are flat or move less than the box size or reversal amount. Point & Figure charts are quite good for establishing support and resistance levels. Chart 1 shows a 30 minute S&P 500 ETF (SPY) Point & Figure chart. Each box represents 50 cents and this is a normal 3 box reversal chart. This intraday chart goes back to mid September. The red A signals the start of October, the red B shows the start of November and the red C marks the start of December (most recent column). Even without annotations we can see clear support and resistance levels. First, the ETF is at potential resistance from the November high at 123. Second, the ETF broke resistance at 120.5 with the surge over the last few days. Broken resistance at 120.5 now turns into the first support level to watch. Just below 120.5, we can see a more important support level at 118. Four columns of Os reversed off this level in November. A break below these lows would be a bearish development. Remember, readers can click this chart to see and adjust the settings.
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Chart 1
SMALL AND MID CAPS OUTPERFORMING LARGE-CAPS... Relative strength in small and mid-cap stocks accelerated over the last few weeks. These two groups have shown relative strength since the late August low. Chart 2 shows the Russell 2000 ($RUT) exceeding its April high this week. After a sharp pullback the first half of November, the index found support at 700 and surged around 7% the last 11 days. The mid November low now becomes the first important support level. The indicator window shows the price relative, which is the $RUT:$SPX ratio. This ratio increases when the Russell 2000 rises faster than the S&P 500. The price relative bottomed in mid-late August and moved above its May high in late November. With this ratio hitting new highs recently, the Russell 2000 clearly shows relative strength and this is positive for the market overall. This reinforces the relative strength we are seeing in the Retail SPDR. John Murhpy noted that relative strength in retailers bodes well for the US economy. Small-caps are also more domestic oriented and relative strength in this group bodes well for the US economy. Chart 3 shows the S&P MidCap 400 ($MID) performing even better than the Russell 2000.
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Chart 2
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Chart 3
GOLD REMAINS STRONG DESPITE CURRENCY FLUCTUATIONS... Despite the sharp November decline in the Dollar, gold remained relatively strong and finished the month closer to its November high then its November low. Now that the Dollar is weakening and the Euro bouncing, gold is catching a second wind with a sharp move higher this week. Chart 4 shows the Gold SPDR (GLD) declining back to support around 128-130 and then quickly reversing in mid November. The ETF moved back above 135 on Monday and surged above 137 in early trading on Friday. There are no signs of significant weakness here. The move reinforces support in the 128-130 area. A break below this zone would reverse the current uptrend. Chart 5 shows weekly prices with GLD in s clear long-term uptrend. The upper trendline of the rising price channel targets a move above 1500.
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Chart 4
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Chart 5
EURO GETS OVERSOLD BOUNCE AS DOLLAR CORRECTS... Is it a mere correction or the start of a bigger decline? This is one of the most difficult questions in technical analysis. Did the Euro reverse its 5-6 month uptrend with the November decline or was this just a correction? Chart 6 shows the Euro Currency Trust (FXE) breaking support around 136 and moving below its June trendline before getting a bounce this week. These support breaks and the depth of the decline argue for a reversal of the 5-6 month uptrend. This means the current bounce is viewed an oversold or corrective bounce that will fail sooner rather than later. The broken trendline extension marks the first resistance level around 134. Broken support marks second resistance around 136. I also think a downtrend is present because RSI moved below 30. Oversold readings occur more often in downtrends than uptrends. Overbought readings are more characteristic of uptrends. With RSI moving into bear mode as well, I would expect resistance in the 50-60 zone.
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Chart 6
Did the Dollar reverse its 5-6 month downtrend with the November surge or was it just a big oversold bounce? As you may have guessed from the Euro analysis, I think the Dollar reversed its 5-6 month downtrend and this weeks decline is a correction. Where might this correction end? There are three techniques we can use. First, a correction should retrace 38-62% of the prior advance. Second, broken resistance turns into support. Chart 7 shows the US Dollar Fund (UUP) with potential support around 22.75. This level coincides with broken resistance and a 50% retracement of the November advance. Third, uptrend support for RSI is in the 40-50 zone.
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Chart 7
CUMULATIVE NET NEW HIGHS LINE REMAINS IN BULL MODE... The bulls to a hit in November and Net New Highs even turned negative for a few days, but the Cumulative Net New Highs Line did not turn down and held above its 10-day EMA. Chart 8 shows two ways to use NYSE Net New Highs ($NYHL). First, Net New Highs can be displayed as a histogram that fluctuates above/below zero. This is shown in the indicator window. Net New Highs are positive when new highs outnumber new lows, which gives the bulls an edge. The bears have an edge when Net New Highs are negative. Second, Net New Highs can be displayed as a cumulative indicator. This means each periods reading is added to the prior level to form a running total. The line rises when Net New Highs are positive and falls when negative. This plot can be overlaid the plot of the underlying index for easy comparison.
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Chart 8
Looking back over the last eight months, the cumulative line rose in April, flatted during the May-June correction and turned up in July. A 10-day EMA was added to help identify upturns and downturns. Since turning up in early July, the Cumulative Line has steadily risen and remained above its 10-day EMA. Even when Net New Highs were briefly negative in late August and mid November, the Cumulative Net New Highs Line remained above the 10-day EMA. These negative readings were not deep enough or did not last long enough to affect the running total. Net New Highs surged above +200 this past week. The bulls are in good shape as long as Net New Highs remain positive and the Cumulative Net New Highs Line rises. Chart 9 shows Nasdaq Net New Highs ($NYHL) for reference.
