STOCHRSI HOLDS IN BULL ZONE FOR DIA -- RSI HOLDS BULL ZONE FOR QQQQ -- RISING RATES WEIGH ON REITS AND UTILITIES -- XLU AND IYR UNDERPERFORM -- MEDICAL DEVICE ETF BREAKS NOVEMBER HIGH -- MEDTRONIC, BOSTON SCI AND STRYKER SURGE
STOCHRSI HOLDS IN BULL ZONE FOR DIA... Link for todays video. The Dow Industrials SPDR (DIA) remains in a long-term uptrend and momentum is bullish overall. Chart 1 shows the ETF stalling around 110-115 the last few weeks, but there are no signs of weakness yet. I would mark first support from broken resistance around 105 and second support based on the summer lows. The ETF is shown with 14-period StochRSI, which is the Stochastic Oscillator applied to RSI. It is like RSI on steroids. This makes it much more volatile and produces more signals. Here is one way to use StochRSI to generate signals. First, determine the path of least resistance. Is the big trend up or down? The big trend is clearly up for DIA as support levels hold and resistance levels are broken. Bullish trades and signals are preferred when the bigger trend is up.
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Chart 1
Once StochRSI moves below .20 to become oversold and signal a pullback in DIA, there are three potential bullish signals: a subsequent break back above .20, a break above .50 or a break above .80. The quickest signal carries highest chance of a whipsaw, which occurred in May and June. The second signal also risks a whipsaw, but crosses above .50 produces good signals from July 2009 until July 2010. The third signal is a cross above .80, which produces the signals with the worst reward-to-risk ratio. See the trend here. The quickest signal produced the best reward-to-risk ratio, but the highest chance of whipsaw. The slowest signal produced the worst reward-to-risk ratio, but the least chance of whipsaw. And therein lies the eternal trade-off. Faster signals are more prone to whipsaw. Slower signals have a worse reward-to-risk ratio. Sometimes it helps to take the middle ground, such as crosses above .50. The green dotted lines shows crosses back above .50 to signal a return to bullish momentum. Notice how the indicator held this level in August and November. A break below this centerline would signal weakening momentum that could lead to a pullback.
RSI HOLDS BULL ZONE FOR QQQQ... Chart 2 shows the Nasdaq 100 ETF (QQQQ) moving above its April high in October and edging above its November high this week. There is nothing but uptrend on this chart. Broken resistance from summer highs marks support around 47.5. It is also possible that we see a support zone in the 47.5-50 area. Broken resistance from the April high is around 50 and the March trendline extends into this zone. The bulls are on firm footing as long as 47.50 holds.
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Chart 2
The indicator window shows 14-period RSI. As expected, it is more subdued than 14-period StochRSI on the DIA chart above. RSI often trades in bull and bear zones. A bull zone typically extends from 40 to 80 and a bear zone from 60 to 20. This is roughly the upper half of the range and lower half of the range. RSI rarely moves below 20 or above 80 on this weekly QQQQ chart. Different securities may require different ranges. RSI broke above 60 in May and has held the 40-50 support zone throughout this bull run. Look for a break below 40 to turn long-term momentum bearish. Before leaving this chart, notice that RSI becomes overbought quite often during an uptrend. Overbought may be a sign that the advance is overextended, but it is also a clear sign of strength.
RISING RATES WEIGH ON REITS AND UTILITIES ... Interest rates have been rising since early October and this rise has taken its toll on REITs and Utilities. Both groups are sensitive to changes in interest rates. REITs pay out most of their income as dividends, which makes these relatively high yielding stocks. Rising interest rates make Treasuries and other instruments more competitive with REITs. In addition, rising interest rates can also adversely affect mortgages related to their properties. Utilities are well known for having high fixed costs and high debt levels. Debt repayment and refinancing is subject to interest rates. PerfChart 3 shows the Real Estate iShares (IYR), the Utilities SPDR (XLU), the 20+ year Bond ETF (TLT) and a few other ETFs for reference. The Perfchart extends from early October to December 9th. First, notice that the 20+ year Bond ETF is down around 10%. During this same timeframe, the 10-year Treasury Yield advanced from around 2.4% to 3.25%. Rising interest rates did not affect the S&P 500 ETF, Finance SPDR, Technology ETF or the Industrials SPDR. Each of these ETFs is up over 8%. In contrast, the Utilities SPDR is down 1.56% and the Real Estate iShares is up just .97% (less than 1%). These two are clearly showing relative weakness during a period of market strength.
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Chart 3
XLU AND IYR UNDERPERFORM BROADER MARKET ... Chart 4 shows the Real Estate iShares (IYR) peaking in early November and breaking support with a decline below 54. The ETF bounced back to 56, but the pattern looks like a rising flag and the ETF broke flag support on Thursday. The indicator window shows the price relative peaking in early September and moving lower he last three months. REITs are underperforming the broader market (SPY).
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Chart 4
Chart 5 shows the Utilities SPDR (XLU) battling trendline support the last two weeks. While SPY moved to a new high in early December, XLU remained well below its late October high. The price relative confirms relative weakness. XLU has been underperforming SPY since the beginning of September.
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Chart 5
MEDICAL DEVICE ETF BREAKS NOVEMBER HIGH... The healthcare sector has been lagging the broader market over the last few months, but the medical device industry group is showing signs of life. Chart 6 shows the Medical Device iShares (IHI) breaking above its November highs with a strong move this week. The ETF surged with the market in September and then consolidated in October-November. This breakout signals a continuation of the prior advance and targets further strength towards the next resistance level around 60-61. The November lows mark key support. The indicator window shows the performance of IHI relative to the S&P 500 ETF (black) and the Healthcare SPDR (red). IHI is flat relative to the market, but outperforming the healthcare sector.
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Chart 6
MEDTRONIC, BOSTON SCIENTIFIC AND STRYKER SURGE... Within the medical device group, chart 7 shows Medtronic (MDT) holding support near its prior consolidation and surging above the channel trendline. Chart 8 shows Boston Scientific (BSX) breaking consolidation resistance and exceeding its November high. Chart 9 shows Stryker (SYK) breaking flag resistance last week and moving above its November high this week.
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Chart 7
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Chart 8
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Chart 9
SHANGHAI COMPOSITE AND XINHAU ETF HIT KEY RETRACEMENTS... While US stocks continue moving higher, the Shanghai Composite ($SSEC) shows relative weakness with a move lower and consolidation the last few weeks. Despite this underperformance, this key index is trading near support from a key retracement and trendline. Chart 10 shows $SSEC stalling at the July trendline and 62% retracement mark. The index declined sharply in mid November and then suddenly stopped. This could be just a rest before the other shoe drops. A move below the November low would signal a continuation lower. Should the index continue to firm, look for a break back above 2900 to revive the bulls. The indicator windo shows the price relative peaking in mid November and moving lower the last few weeks as the Shanghai Composite lags the S&P 500. Chart 11 shows the Xinhua/China 25 ETF (FXI) near a similar support zone.
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Chart 10
