SMALL-CAPS LEAD BROAD PULLBACK -- RETAIL SPDR BREAKS PENNANT SUPPORT -- URBAN, LIMITED AND POLO LEAD APPAREL GROUP LOWER -- CONSUMER DISCRETIONARY SPDR MAINTAINS SLOWING UPTREND -- EURO, DAX AND CAC40 BREAK THEIR DECEMBER HIGHS
SMALL-CAPS LEAD BROAD PULLBACK IN STOCKS... Link for todays video. The bigger trend remains up, but overbought stocks took a breather on Wednesday as profit taking took hold. Small-caps led the way lower with the Russell 2000 ETF (IWM) loosing twice as much as the Nasdaq 100 ETF (QQQQ) and the S&P 500 ETF (SPY). Chart 1 shows IWM moving back below 80 with a long black candlestick. The candlestick is filled black because the current level is below the open. In other words, the ETF opened at 80.57 and moved steadily lower throughout the day. IWM is up some 35% since late August and 13% since mid November, which makes it overbought by most yardsticks. A correction or sideways consolidation is very possible at some stage. The early January lows mark the first support level and broken resistance marks the second support around 74. Notice that IWM (small-caps) has been lagging SPY (large-caps) since 21-December. The Price Relative (IWM:SPY ratio) peaked on 21-Dec and moved lower the last four weeks. Relative weakness in small-caps is not a good sign for the market. Small-caps are more economically sensitive and more tied to the domestic economy. The combination of overbought conditions and relative weakness in small-caps increases the chances of a correction.
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Chart 1
Chart 2 shows the Nasdaq 100 ETF (QQQQ) opened above its prior close and moving sharply lower throughout the day. A close below 56.52, the prior open, would forge a bearish engulfing pattern. These are short-term bearish candlestick reversal patterns that require confirmation with further weakness (follow through). As with IWM and the rest of the market, QQQQ is overbought and ripe for some sort of correction or consolidation. A pullback to broken resistance around 54 is quite possible. Also note that the December consolidation marks a support zone around 54-55. At this point, I see no evidence of a major top. The market is simply overbought and ripe for a corrective period. Corrections can take two forms: a decline that retraces a portion of the prior advance or a sideways trading range.
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Chart 2
RETAIL SPDR BREAKS PENNANT SUPPORT ... The retail group has been relatively weak since late December. Retail drives some 2/3 of GDP and this group is one of the most economically sensitive. Retailers are also an important part of the consumer discretionary sector. Michael Kahn, who pens the Getting Technical Column at Barrons, wrote about relative weakness in the Retail HOLDRS (RTH) on Tuesday. We can echo that sentiment with relative weakness in the Retail SPDR (XRT). Chart 3 shows XRT falling sharply the first week of January and then consolidating with a pennant. With todays decline, the ETF broke below pennant support to signal a continuation lower. This targets a move towards the next support zone around 43-44. The October consolidation and 38-50% retracement zone mark support in this area.
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Chart 3
The indicator window shows the Price Relative, which is the XRT:SPY ratio. This ratio rises when XRT outperforms and falls when XRT underperforms. Retailers outperformed the broader stock market from September to November and underperformed from December to mid January. As an economically sensitive group, relative weakness in retail is a negative for the market overall.
URBAN, LIMITED AND POLO LEAD APPAREL GROUP LOWER... The retail group can be divided into sub-industry groups. For example, retail includes apparel stores, auto parts stores, electronic stores, department stores, specialty stores and others. The next three charts come from the Retail-Apparel group. Chart 4 shows Limited (LTD) breaking support with a sharp decline in early January and forming a rising flag last week. The stock broke flag support today and the next support zone resides around 26-27. Chart 5 shows Polo Ralph Lauren (RL) breaking support with a high volume decline the first week of January. A rising flag also formed this past week and the stock broke flag support today. Chart 6 shows Urban Outfitters (URBN) falling back to broken resistance over the last 6-7 weeks. This area may act as support, but a move above the January high is needed to reverse the current slide.
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Chart 4
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Chart 5
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Chart 6
CONSUMER DISCRETIONARY SPDR MAINTAINS SLOWING UPTREND... There is a difference between less upside momentum and actual downside momentum. Momentum indicators surge when prices move sharply higher. These same momentum indicators decline when this advance slows. The advance is still underway, but prices are not appreciating as fast. Bearish divergences often form because price moves to a new high and the momentum oscillators move lower. While these divergences show less upside momentum, there is really not any downside momentum present. In other words, prices are not moving lower at all. This is exactly what happened with the Consumer Discretionary SPDR (XLY) over the last few months. Chart 7 shows XLY with RSI and MACD surging in September and hitting their highs in the first half of November. Both moved lower the last two months as XLY continued higher and exceeded its November high. Technically, bearish divergences formed. Realistically, prices did not reverse their uptrend or break support on the chart. The advance slowed to a crawl over the last seven weeks, but XLY managed to hold support and work its way higher. Even with todays sharp decline, XLY remains above its first support, which is marked by the December lows. A break below these lows would provide the first sign of weakness on the price chart. Moral of the story? Watch price action first and momentum second.
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Chart 7
EURO, DAX AND CAC40 BREAK THEIR DECEMBER HIGHS ... The Euro started the year under pressure, but quickly reversed course and moved to a new high for the year on Wednesday. Even though the year is only 12 trading days old, this about-face shows strength. Chart 8 shows the Euro Currency Trust (FXE) breaking below its December lows with a decline below 130 at the start of January. After successful bond auctions in Italy, Portugal and Spain, the Euro reversed course and quickly recouped these losses. Todays follow through break above the December highs shows more strength - and confidence in Europe. The Euro was also bolstered by a little help from a central bank with some $2.85 trillion in foreign reserves (China). Regardless of the reasons, the Euro broke resistance and this bullish development was reinforced with new highs in the German and French equity indices. Chart 9 shows the French CAC Index ($CAC) breaking above its December highs. Chart 10 shows the German DAX Index ($DAX) recording a 52-week high on Tuesday. The January lows now mark the first support levels to watch for signs of a trend reversal.
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Chart 8
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Chart 9
