IWM AND QQQQ FIRM NEAR SHORT-TERM SUPPORT LEVELS -- OIL LEADS ENERGY COMPLEX HIGHER -- ENERGY SPDR AND OIL SERVICE HOLDRS HIT 52-WEEK HIGHS -- SURGE IN COPPER PUSHES BASE METALS ETF HIGHER -- BONDS SLUMP AS COMMODITIES SURGE
IWM AND QQQQ FIRM NEAR SHORT-TERM SUPPORT LEVELS... Link for todays video. After a sharp decline on Friday, the major index ETFs rebounded on Monday and then consolidated. Chart 1 shows the Russell 2000 ETF (IWM) falling over 2% on Friday and then forming a doji on Monday. These candlesticks evolve with an open and close that are relatively equal. The high and low form relatively equal lines above and below the open-close line. Overall, the candlestick looks like a plus sign (+) of sorts. Doji represent a standoff between bulls and bears. This indecisive candlestick formed near the January lows to reinforce the support zone around 77. Chart 2 shows the Nasdaq 100 ETF (QQQQ) firming near its mid January low to confirm support around 55.50.
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Chart 1
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Chart 2
These two ETFs are important to watch because they represent important segments of the stock market. IWM represents small-caps, while QQQQ represents large techs. These two were leading the market (SPY) higher from September to November. The indicator windows shows the IWM:SPY ratio and the QQQQ:SPY ratio to measure relative performance. QQQQ relative performance peaked in late November, while IWM relative performance peaked in mid December. Relative weakness in these two groups is not a good sign for the market overall.
OIL LEADS ENERGY COMPLEX HIGHER... The oil market remains rattled by recent unrest in Egypt. Energy markets fear that the unrest could spread to Yemen and then to oil-rich Saudi Arabia. Market concern is also focused on the Suez canal. According to an article from the Financial Times (FT.com), around 8% of the worlds shipping cargo passes through the Suez canal. Of this percentage, around 25% is oil. Needless to say, problems in the canal would affect global oil supplies. Before getting alarmist on the unrest in Egypt, I would recommend readers google Stratfor Egypt 2011 for a levelheaded take on the situation. Oil was up over 3% in Monday with these various concerns in mind. From a trading or investing standpoint, there is risk that these concerns may be overblown. Oil would probably give back these gains should the unrest subside. Chart 3 shows the USO Oil Fund (USO) surging over 7% the last two days. This surge is occurring within an overall uptrend and the ETF is nearing resistance around 39. Chart 4 shows the US Gasoline Fund (UGA) within an uptrend and outperforming oil since mid August, which is just before the summer low in stocks.
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Chart 3
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Chart 4
ENERGY SPDR AND OIL SERVICE HOLDRS HIT 52-WEEK HIGHS... Unsurprisingly, strength in oil carried over into the Energy SPDR (XLE) and the Oil Service HOLDRS (OIH). Chart 5 shows XLE within a steep uptrend since late August. Pullbacks have been limited to just a few days and a few percent the last five months. After a 40+ percent advance in five months, this advance is certainly overextended and ripe for a pullback or consolidation. However, there are simply no signs of weakness. Notice that the Commodity Channel Index (CCI) moved above zero at the beginning of September and held this level throughout the advance. At the very least, a move into negative territory is needed to signal a bearish turn in momentum that could foreshadow a correction.
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Chart 5
Chart 6 shows OIH leading the way in January. The indicator window sports the OIH:XLE ratio (black) and the OIH:$WTIC ratio (red). After a performance dip in December, OIH started outperforming the Energy SPDR (XLE) again in January. OIH is also outperforming oil as the OIH:$WTIC ratio moved to a new 52-week high this month.
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Chart 6
SURGE IN COPPER PUSHES BASE METALS ETF HIGHER... Strength in commodities was not confined to the energy complex. Bloomberg reports that copper hit an all time high in London and coffee advanced to its highest level since 1977. Coal rose to multi-year highs in January after the Australian floods. Corn and Soybeans are trading near 52-week highs. Wheat surged and broke resistance in mid January. In Thursdays Market Message, John Murphy showed the Agriculture ETF (DBA) and the DB PS Multisector Energy Fund (DBE) surging over the last five months. We can add the Base Metals ETF (DBB) to the strong list as well. Chart 7 shows DBB surging over 2% today. The ETF is clearly in an uptrend as it recorded a new 52-week high at the beginning of January. The indicator window shows DBB (black) with SPY (red). As with oil, there appears to be a positive correlation between stocks and base metals right now. Both have been rising and falling together the last 12 months. I would not expect both to rise together forever though. As Murphy alluded in last weeks commentary, rising commodity prices will ultimately choke off a stock market rally.
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Chart 7
BONDS SLUMP AS COMMODITIES SURGE... Unrest in Egypt triggered a flight to safety on Friday, but todays stock market rebound and surge in commodity prices weighed on the bond market. Admittedly, the intermarket situation is rather strange. Todays surge in oil is attributed to unrest in Egypt, but gold and bonds did not advance in a flight to safety. With commodities surging almost across the board today, bonds may be more concerned with inflation at this point. Chart 8 shows the 7-10 year Bond ETF (IEF) with a rising wedge over the last seven weeks. A break below wedge support would signal a continuation of the November-December decline. Chart 9 shows the 20+ year Bond ETF (TLT) within a downtrend since late August, which coincides with an uptrend in stocks. This trend is clearly down as long as resistance at 94 holds.
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Chart 8
