DIA AND QQQQ CONSOLIDATE ABOVE BREAKOUTS -- STRONG COPPER BODES WELL FOR ECONOMY -- SURGING LUMBER BODES WELL FOR HOMEBUILDERS -- OIL FORMS A BULL FLAG -- ENERGY SECTOR LEADS MARKET -- SHANGHAI COMPOSITE FAILS TO HOLD BREAKOUT
DIA AND QQQQ CONSOLIDATE ABOVE THEIR BREAKOUTS... Link for todays video. Broken resistance turns into support. This is basic tenet of technical analysis. With the December surge, a number of indices and ETFs broke above their November highs. Once broken, these highs turn into the first supports level to watch. Chart 1 shows the Dow Industrials SPDR (DIA) breaking above resistance around 114 and this area turning into support. A move back below 114 would be negative and argue for a retracement of the December surge. Broken resistance around 112 would then become the next support level to watch. For now, the breakout at 114 is holding and there are simply no signs of price weakness. Chart 2 shows the Nasdaq 100 ETF (QQQQ) breaking resistance at 54 and holding this breakout with a consolidation the last seven days. The ability to hold the breakout shows continued buying pressure. A break below 54 would suggest an increase in selling pressure that could lead to a retracement of the December advance.
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Chart 1
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Chart 2
NEW HIGH IN COPPER BODES WELL FOR THE ECONOMY... Commodities remain strong overall with new highs recently in copper, lumber and oil. Stocks also remain strong with new highs recently in the Russell 2000 (Small-caps), the Nasdaq (techs) and the S&P 500. Stocks and commodities reflect the growing perceptions that economic expansion will continue into 2011 and perhaps even accelerate. Chart 3 shows Copper Continuous-Futures ($COPPER) exceeding its November high with a surge in December. The trend is nothing but up in this key industrial commodity. Notice that Dr. Copper formed a bullish divergence in June-July to foreshadow the summer bottom in the S&P 500. While the S&P 500 formed a lower low, copper formed a higher low and showed relative strength. Given the strong positive correlation with these two, I would expect stocks to remain strong as long as copper maintains its uptrend.
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Chart 3
SURGING LUMBER BODES WELL FOR HOME-BUILDERS... Chart 4 shows Lumber Continuous-Futures ($LUMBER) surging above its November higher with a strong move the last two weeks. Also notice that lumber bottomed eight days ahead of the S&P 500 this summer. The moved to new highs suggest that demand is or will be improving in the coming months. This also confirms recent breakouts in home-building stocks and ETFs. John Murphy featured upside breakouts in many housing-related stocks on Thursday. This group is up strong again today.
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Chart 4
OIL FORMS A BULL FLAG AS GASOLINE BREAKS OUT... Chart 5 shows Oil Continuous-Futures ($WTIC) forming a bullish divergence in the summer foreshadowed the summer low in the S&P 500. Both oil and stocks have been rising steadily since the late August lows. Oil surged to 90 in early December and then formed a falling flag the last two weeks. These are bullish continuation patterns. A break above 90 would signal a continuation higher and open the door to the upper 90s. Flags are said to fly at half-mast. The pole extends from 80 to 90, which is around 10 points. After a breakout, we can add this to the flag low for a target. Chart 6 shows the USO Oil Fund (USO) for reference. Chart 7 shows the US Gasoline Fund (UGA) breaking flag resistance.
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Chart 5
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Chart 6
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Chart 7
ENERGY SECTOR CONTINUES TO LEAD THE MARKET... The Energy SPDR (XLE) led the market higher on Monday with a move above 66. Even though the ETF is overbought and ripe for a correction, there are simply no signs of price weakness currently. Chart 8 shows XLE breaking triangle resistance in late September. This triangle breakout and a similar breakout in the Oil Service HOLDRS (OIH) were featured in the Market Message on September 29th. XLE is now up over 30% from its late August lows. Moreover, there has yet to be a correction or significant pullback. The late August trendline and early December lows mark first support. Chartists can also watch the Commodity Channel Index (CCI), which remains in positive territory. CCI turned positive in early September and has held above the zero line for almost four months. This is a classic case of becoming overbought and remaining overbought during a strong uptrend. Chart 9 shows OIH with a similar short-term support level.
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Chart 8
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Chart 9
SHANGHAI COMPOSITE FAILS TO HOLD BREAKOUT... A brief peruse of the headlines suggests that Chinese stocks moved lower because of Korean tension, domestic inflationary pressures and European debt woes. Chart 10 shows the Shanghai Composite ($SSEC) breaking above resistance at 2900 last week, but failing to hold the breakout** and falling sharply on Monday. The failure to hold this breakout/surge is negative and calls for a reassessment.
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Chart 10
Chart 11 shows a shorter timeframe. The index declined sharply in mid November and then consolidated the last 4-5 weeks. There is a slight upward bias to this consolidation, which makes it look like a bear flag. Bearish flags form after a sharp decline and slope up. Bullish flags form after a sharp advance and slope down. A move below the December low would break flag support and argue for a continuation of the November decline.
