HEALTHCARE SECTOR CHALLENGES NOVEMBER HIGH -- BREADTH WANES AS NET ADVANCES TURN MIXED -- NYSE AD LINE FAILS TO CONFIRM NEW HIGH -- VIX AND VXN TRADE IN LONG-TERM SUPPORT ZONES -- SPAIN LEADS EUROPEAN STOCKS LOWER
HEALTHCARE SPDR CHALLENGES NOVEMBER HIGH... Link for todays video. The Healthcare SPDR (XLV) has been lagging the market most of the year, but may be coming back to life with a surge over the last 2 1/2 weeks. Last week I wrote about the breakout in the iShares DJ US Medical Device Index Fund (IHI), which is part of the healthcare sector. Today, we are seeing the Healthcare SPDR challenge its November high. Chart 1 shows weekly candlesticks with XLV breaking resistance in September and broken resistance turning into support around 30. The breakout held with a bounce the last three weeks. Also notice that StochRSI held its centerline (.50) with bounces in August and November to keep momentum bullish. This long-term uptrend is in good shape as long as XLV holds 30 and StochRSI holds above its centerline. Chart 2 shows XLV surging to resistance after a consolidation breakout on Friday. Prior to this break, the ETF broke wedge resistance to signal a continuation of the Sep-Oct advance.
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Chart 1
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Chart 2
BREADTH WANES AS NET ADVANCES% TURNS MIXED... The NY Composite ($NYA) has been on a tear in December with a surge above the November high. This broad index advanced six of the last eight days as it broke above 7800. Even though the index moved higher, Net Advances% leveled off recently and breadth is not keeping pace. Net Advances% equals advances less declines divided by the total number of issues ($NYAD:$NYTOT). Dividing by the total shows Net Advances as a percentage of total issues traded, which makes it easier for comparative purposes. In general, Net Advances% is strong when above +.50 (+50%).
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Chart 3
Chart 3 shows the NY Composite with Net Advances% in the indicator window. Notice how Net Advances% moved above +.50 at the beginning of December, but turned mixed over the last eight days. The NY Composite ($NYA) has been up 6 of the last 8 days, but Net Advances% has been positive only 4 of the last 8 days. This means the NY Composite actually advanced with negative breadth for 2 days. Even though we have yet to see any signs of material selling pressure, the standoff in Net Advances% indicates that buying pressure is starting to wane. This is not bearish just yet. It is just a sign that the bulls may be tiring. Users can click the chart to see the settings and save it to their favorites list.
NYSE AD LINE FAILS TO CONFIRM NEW HIGH... The NYSE AD Line provides another take on Net Advances%. Instead of daily readings, the AD Line provides a running total (cumulative) for Net Advances%. Most of the time, the AD Line moves step-for-step with the NY Composite. A new high in the index is usually confirmed with a new high in the AD Line. Sometimes, the AD Line fails to confirm the index to set up a divergence. Chart 4 shows the NY Composite exceeding its November high, but the AD Line failing to follow suit so far. This means a bearish divergence could be brewing. Should the AD Line fail to take out this high, look for a move below the 50-day SMA to confirm the bearish divergence. Yes, you can add moving averages to indicators by clicking on advanced options.
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Chart 4
VIX AND VXN HIT LONG-TERM SUPPORT ZONES... The CBOE Volatility Index ($VIX) is often heralded as an indicator of fear and complacency. Implied volatility surges when fear grips the market. Implied volatility declines when the market is confident. How low must implied volatility go before it signals complacency or excessive bullishness? Lets look at the historical record for some clues. Chart 5 shows the VIX over the last four years with a support zone that extends back to September 2007. Moves into this support zone corresponded with a peak in the S&P 500, though sometimes with a lag. Notice that the S&P 500 peaked a month after the VIX dipped below 17 in March 2010.
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Chart 5
While a move into the 15-17 zone marks support and potential complacency, the VIX should be considered bullish for stocks as long as it falls. Yes, the VIX is quite a good coincident indicator. In other words, down trends in the VIX coincide with up trends in the S&P 500. VIX moved lower from March 2009 until April 2010 and from July 2010 to December 2010. A declining VIX suggest that implied volatility is falling and risk is decreasing. Lower volatility and lower risk are positive for stocks. Think of the VIX in terms of a momentum oscillator. RSI can become overbought and remain overbought in a strong uptrend. Similarly, implied volatility can move to low levels and remain at low levels in a strong uptrend. A break above the November high would reverse the downtrend in the VIX and this would be bearish for stocks. Chart 6 shows the Nasdaq 100 Volatility Index ($VXN) for reference.
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Chart 6
SPAIN LEADS EUROPEAN STOCKS LOWER... Moodys threat to downgrade Spains credit rating is being blamed for weakness in European stocks on Wednesday. This threat follows a similar warning from Standard & Poors regarding Belgian debt. Also note that yields for Portuguese 3-month t-bills surged to 3.4%. This is almost twice as high as yield for the same paper in early November. Debt is getting more expensive to maintain and rollover. The Spain Bolsa de Madrid IBEX 35 Index ($IBEX) led European stocks lower on Wednesday with a sharp loss. The IBEX finished near 10000 with a loss around 1.5%. This is a concern because weakness here could spread into European stocks and into the Euro, which would be negative for US stocks. Chart 7 shows the IBEX hitting resistance around 11000 and breaking down in November. Also notice that the 62% retracement confirmed resistance in this area. RSI broke down in late January with a move below 40 and the 50-60 zone provided resistance the rest of the year. In short, the long-term trend here is down and further downside is expected.
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Chart 7
Chart 8 shows the IBEX hitting resistance near broken support and the 50-62% retracement zone. The December bounce was incredibly sharp, but the index is hitting resistance where it should in a long-term downtrend. A break above 10400 is needed to re-evaluate the bearish outlook for Spanish equities.
