BROKEN RESISTANCE LEVELS TURN FIRST SUPPORT -- HOME BUILDING ETFS CHALLENGE NOVEMBER HIGHS -- HOME DEPOT, LOWES, LENNAR AND KB HOME LEAD THE CHARGE -- EURO STOXX 50 INDEX RECOVERS FROM SUPPORT BREAK -- GERMAN DAX HOLDS STRONG AS FRENCH CAC WEAKENS
BROKEN RESISTANCE LEVELS TURN INTO FIRST SUPPORT... Link for todays video. With more than a few breakouts last week, many charts show resistance levels that now become the first support levels to watch. This is a basic tenet of technical analysis: broken resistance turns into support. Once this overhead supply level (resistance) is broken, it becomes a source of demand (support). Charts 1 and 2 show the S&P MidCap 400 SPDR (MDY) and the Russell 2000 ETF (IWM) leading the market higher with breaks above their November highs. These two are the only two major index ETFs to break above their November highs. Broken resistance from these highs now becomes the first support level to watch on any pullback. Both are up over 7% in the last three weeks and getting short-term overbought. We do not need a momentum oscillator to figure this one out. As far as the medium-term uptrend is concerned, the November lows forged reaction lows that mark key support for both ETFs.
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Chart 1
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Chart 2
HOME BUILDING RELATED ETFS CHALLENGE NOVEMBER HIGHS... The Home Construction iShares (ITB) and the Homebuilders SPDR (XHB) have quickly gone from laggards to leaders. Chart 3 shows XHB pulling back sharply in November, but finding support near the October low and surging the last five days. This surge reinforces support in the 15.3 area. Perhaps more importantly, this move indicates that an uptrend since late August remains in progress. The indicator window shows the price relative, which is the XHB:SPY ratio. This ratio measures relative strength or weakness. XHB is relatively weak when the ratio falls and relatively strong when the ratio rises. The ratio dipped to a new low in late November, but turned up the last two weeks with a rather abrupt about face.
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Chart 3
Chart 4 shows ITB actually breaking support from the October low, but recovering and moving back above 12 with a sharp surge the last five days. This looks like a good old fashion bear trap. The ETF broke support and the price relative (ITB:SPY) ratio hit a new low in November. These bearish developments have been negated with the move above 12.
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Chart 4
HOME DEPOT, LOWES, LENNAR AND KB HOME LEAD THE CHARGE... Looking through the industry group, we can see big moves in two builders and in two building related retailers. Chart 5 shows Home Depot (HD) holding support around 30 and surging above consolidation resistance with good volume the last four days. Chart 6 shows Lowes (LOW) also breaking out with a big move on big volume last week. These broken resistance zones now turn into support zones.
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Chart 5
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Chart 6
Chart 7 shows Lennar (LEN) with an ascending triangle breakout last week. Volume was strong on the early November bounce and again the breakout surge. Ascending triangles are bullish continuation patterns. Chart 8 shows KB Home (KBH) giving traders fits with a high-volume breakout in early November and then a pullback all the way below 11. The stock ultimately held above its early November low and then surged back above the resistance break with good volume.
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Chart 7
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Chart 8
EURO STOXX 50 INDEX BOUNCES BACK AFTER SUPPORT BREAK... Is it broken or not? Chart 9 shows the DJ Euro Stoxx 50 ($STOX5E) breaking support from the October low, but immediately recovering with a surge back above 2750. Technically, the index closed below support for two days and a lower low did form. Given the overall pattern and weakness in the peripheral, I would consider this support break valid. In other words, the bounce back above 2750 is just an oversold bounce. After a sharp decline in April-May, the index advanced from June to November with a rising wedge. These patterns are typical for counter trend rallies that form a lower high. The index never even got close to its April high. With the November support break, it looks like the trend is reversing and lower prices are expected over the next few months. This index is the Dow Industrials of Europe. There are 50 stocks representing 9 countries and 18 industry groups. French and German stocks dominate the index, while finance-related stocks (14) form the single biggest group. It is a good cross-section of core Europe.
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Chart 9
GERMAN DAX HOLDS STRONG AS FRENCH CAC WEAKENS... Chart 10 shows the German DAX Index ($DAX), which remains the strongest of all European indices. In fact, the problems in the rest of Europe seem to push more money into German stocks. The DAX has even held up after the Euro declined sharply in November. Chart 11 shows the French CAC Index ($CAC) looking quite like the Euro Stoxx 50 Index. Notice how the French Index briefly broke support and then rebound. Also notice how this French index seems to track the Euro quite closely. A downturn in the Euro could spell renewed weakness for French stocks.
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Chart 10
