IMPORTANT SUPPORT COMING INTO PLAY FOR QQQQ -- A BEARISH FAILURE SWING WORKING FOR IWM -- MINUS DIRECTIONAL MOVEMENT SURGES FOR XLF -- TREASURIES HIT RESISTANCE WITH SHARP DECLINE -- LONG-TERM INTEREST RATES BOUNCE OFF SUPPORT
IMPORTANT SUPPORT COMING INTO PLAY FOR QQQQ... Link for todays video. With a couple of sharp declines the last two weeks, the Nasdaq 100 ETF (QQQQ) established an important support zone to watch going forward. QQQQ represents the performance of large tech stocks. There are, or course, stocks other than large techs in the ETF, but the vast majority come from the technology sector. Chart 1 shows the ETF in an uptrend overall with a 52-week high recorded in mid February. After this high, QQQQ gapped down and tested support near the late January lows. With the bounce last week, I am setting a short-term support zone based on these lows around 55.4-56 (orange area). Last weeks gap remains unfilled as QQQQ failed at the gap-zone with yesterdays open. Despite these short-term negatives, the bulls still have an edge as long as this support zone holds. A move below the late January lows would clearly break support and argue for a deeper decline.
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Chart 1
The indicator window shows classic 14-period RSI. The indicator is forming its second bearish divergence in the last four months. The first was never confirmed as QQQQ turned up sharply at the beginning of January. A second bearish divergence formed over the last two months, but I still consider RSI (momentum) bullish as long as RSI holds the 40-50 zone. Notice that this zone held in November and late January. A break below 40 would turn momentum bearish.
IWM RELIVES THE LATE JANUARY DANCE... Chart 2 shows the Russell 2000 ETF (IWM) with a price sequence similar to late January. The green circles show IWM declining sharply, rebounding with a 1-3 day bounce, declining again with a long black candlestick and then consolidating with a small candlestick. IWM held its prior low in late January and began a surge on February 1st. As such, I will be watching last weeks low for the first clues. Astute chartists will also note that RSI has a bearish divergence working. In fact, RSI has a Bearish Failure Swing is taking shape. There are four parts to this signal, which was developed by Welles Wilder himself. First, RSI moves above 70 to become overbought. Second, RSI declines below 70. Third, RSI bounces and fails to exceed 70 to form a lower high. Fourth, RSI turns down and breaks its prior low. The Bearish Failure Swing would be confirmed with a break below the late January lows. You can read more on RSI in our ChartSchool article.
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Chart 2
MINUS DIRECTIONAL MOVEMENT SURGES FOR XLF... I will also be watching the Finance SPDR (XLF) closely for clues on the broader market. Like QQQQ, the Finance SPDR has a support zone marked by the low in late January and February. The ETF gapped down last week and held this gap after moving sharply lower on Tuesday. Despite this sharp decline, support is holding and the bears have yet to seize the trend. The indicator window shows the Average Directional Index (ADX) with the Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI). ADX measures the strength of the trend, with no regard for direction. +DI (green) measures the strength of up movements and DI (red) measures the strength of down movements. Evidence of selling pressure is emerging as DI crossed above +DI and surged to its highest level in over six months. Further strength in DI and further weakness in +DI would most certainly accompany a support break at 16.20. See our ChartSchool article on ADX for all the gory details.
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Chart 3
TREASURIES HIT RESISTANCE WITH SHARP DECLINE... John Murphy wrote about rising commodity prices and rising gold prices on Tuesday. In particular, Murphy noted that these prices are rising against all currencies. In other words, it is a global phenomenon. Moreover, this phenomenon is inflationary, which explains the recent surge in gold. But what about bonds? Even though bonds loathe inflation, the bond market has been rising since mid February. This means interest rates have been falling for 2-3 weeks. Bonds typically decline in the face of inflation because inflationary pressures put upward pressure on interest rates. I suspect that bonds caught a bid because of stock market weakness and uncertainty in the Middle East and North Africa. That bid may be ending. Treasuries were down sharply on Wednesday on news that private sector employment increased by 217,000 in February. The numbers from this ADP Employment report were better than expected. Perhaps more importantly, they offer a glimpse of what to expect with Fridays employment report. A strong report on Friday would put more pressure on the Fed to raise rates, which would be bearish for bonds.
Turning to the charts, the 2-3 week advance in bonds looks small compared to the prior decline from September to February. In other words, the advance is still part of a larger downtrend and bonds may hit resistance soon. Chart 4 shows the 20+ year Bond ETF (TLT) breaking channel resistance over the last two weeks. Despite this trendline break, I would still classify the overall trend as down. The January highs mark important resistance just above 92. The indicator window shows the 20+ year Bond ETF (black) with the S&P 500 ETF (red). These two have been moving in opposite directions since late August (bonds down and stocks up). The correlation continues as bonds bounced and stocks fell over the last 7-8 trading days. A flight-to-safety or the risk-off trade remains the big wild card for bonds. Weakness in stocks and further strength in oil could benefit bonds, even though rising oil prices stoke inflationary pressures. The Fed is probably more concerned with the employment situation, the economy and the soundness of the banking system.
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Chart 4
Chart 5 shows the 7-10 year Bond ETF (IEF) hitting support at its 62% retracement mark and bouncing above the wedge trendline. This is positive, but it would take a break above the January highs to fully reverse the downtrend.
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Chart 5
LONG-TERM INTEREST RATES BOUNCE OFF SUPPORT... It is often helpful to consult the long-term interest rate charts when analyzing the Treasury ETFs. The 10-year Treasury Yield ($TNX) corresponds well to the 7-10 year Bond ETF (IEF), while the 30-year Treasury Yield ($TYX) aligns largely with the 20+ year Bond ETF (TLT). Chart 6 shows the 10-year Treasury Yield bottoming in October and moving higher the last 4-5 months. $TNX broke triangle resistance in early February as the stock market surged (money moved out of bonds). The 10-year Yield pulled back to the broken resistance zone that now becomes support in the 34-35 area (3.4% to 3.5%). This puts the 10-year Yield and Treasury market at an interesting juncture. A hold here and break above 35 would suggest higher rates and lower bond prices. Key support for $TNX is marked at 32.5 (3.25%). A move below this level would be quite bullish for bonds and would likely entail a serious move to the risk-off trade.
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Chart 6
Chart 7 shows the 30-year Treasury Yield ($TYX) also at a most interesting juncture. The decline over the last 2-3 weeks retraced 62% of the January-February advance. There is possible support around 45 (4.5) that could give way to a bounce that would resume the bigger uptrend in interest rates. Also notice that RSI is trading near 40. The 40-50 zone marks support during an uptrend.
