LARGE-TECHS AND SMALL-CAPS LEAD MARKET LOWER -- FINANCE SHOWS RELATIVE WEAKNESS -- MATERIALS AND STEEL ETFS FORM SMALL BEARISH PATTERNS -- SEMIS AND NETWORKING LEAD TECHS LOWER -- INTEL FAILS AT RESISTANCE AS GOOGLE BREAKS SUPPORT
LARGE-TECHS AND SMALL-CAPS LEAD MARKET LOWER... Link for todays video. The Nasdaq 100 ETF (QQQQ) and Russell 2000 ETF (IWM) led the major index ETFs lower on Monday. Chart 1 shows QQQQ meeting resistance from the 22-February gap over the last two weeks. The ETF gapped up and closed above 58 last Thursday, but failed to hold these gains and filled the gap on Monday. Also notice that a small rising wedge or flag has taken shape with the advance of the last two weeks. This is a bearish continuation pattern. A close below last weeks low would confirm the pattern to signal a continuation of the late February decline. According to traditional technical analysis, flags fly at half-mast. The first decline was around 3 points (59 to 56). A 3 point decline from last weeks high would target a move to around 55.30. There is also a support zone around 54 from broken resistance and the December consolidation. The indicator window shows RSI with a bearish divergence. This key momentum oscillator is also testing uptrend support in the 40-50 zone, which held in November and January. A break below this level would turn RSI bearish. Chart 2 shows IWM with similar characteristics. Even though flag/wedge continuations would be short-term bearish, I do not see a major reversal pattern that would suggest a bigger trend reversal in the works.
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Chart 1
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Chart 2
FINANCE SECTOR SHOWS RELATIVE WEAKNESS... The finance sector showed relative strength in December and early January, but failed to keep pace in early February and shows relative weakness the last few weeks. Chart 3 shows the Finance SPDR (XLF) gapping down on 22-Febuary and failing at this gap at the end of the month. The ETF also got a bounce last Thursday, but this bounce did not come close to the prior weeks high. Note that IWM and QQQQ formed rising flag/wedges as higher highs formed last week. The lower high in XLF shows relative weakness in an important sector. Key support is set around the 16.2-16.4 zone. Support is holding for now. A break below this level would argue for a deeper retracement of the November-February advance.
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Chart 3
Chart 4 shows the Regional Bank SPDR (KRE) with a big triangle consolidation over the last 2-3 months. The ETF surged in December and then digested these gains with the current consolidation. Watch the boundaries for the next directional clue. A break above triangle resistance would be bullish, but a break below support would be bearish. Notice that a smaller triangle is taking shape over the last two weeks. Basically, KRE never fully recovered from the late February decline. The indicator window shows the KRE:SPY ratio. Notice that KRE has been underperforming since late December, which is when the Price Relative peaked. A break above the February high is needed to revive this relative performance line.
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Chart 4
MATERIALS SPDR AND STEEL ETF FORM BEARISH CONTINUATION PATTERNS... Chart 5 shows the Basic Materials SPDR (XLB) getting hit hard in late February and then forming a pennant. These small consolidations are continuation patterns, which means the direction of the prior move dictates the bias. The prior move was down as the ETF gapped lower and plunged below 39. After a consolidation to work off oversold conditions, the ETF broke the pennant trendline today. This break opens the door to the next support zone around 36.5, which stems from broken resistance. The indicator window shows the Price Relative (XLB:SPY) ratio forming a lower high in February and moving lower the last few weeks. XLB shows relative weakness. Chart 6 shows the Steel ETF (SLX) breaking flag support with a sharp decline.
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Chart 5
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Chart 6
SEMIS AND NETWORKING LEAD TECHS LOWER... Within the technology sector, semiconductor and networking shares led the way lower. Chart 7 shows the Semiconductor HOLDRS (SMH) hitting resistance from its late February high last week and declining around 3% today. Despite such a sharp decline, the overall trend remains up. SMH is up some 50% since late August. On a closing basis, the ETF has not experienced a pullback greater than 5% since August. Even though SMH is ripe for a correction or consolidation, the overall uptrend cannot be denied as long as the ETF holds the late February reaction low. A lower low would argue for a trend reversal and a more protracted correction. The next support zone stems from the December consolidation around 32.
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Chart 7
Chart 8 shows the Networking iShares (IGN) meeting resistance from the 22-February gap and declining over 2% on Monday. Despite this sharp decline, IGN also remains in a clear uptrend. The trendline extending up from the October low has yet to be challenged and key support from the late February low has yet to be broken.
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Chart 8
INTEL FAILS AT RESISTANCE AS GOOGLE BREAKS SUPPORT... Chart 9 shows Intel (INTC) breaking above resistance in late February, but failing to hold that breakout with a sharp decline. A failed breakout is akin to a bull trap. The breakout entices the bulls to buy, but they become trapped with a sudden move back below the breakout. Intel has since been consolidating the last few weeks with support around 21 and resistance around 22. Downside volume has been outpacing upside volume since late February. This suggests more energy in selling pressure than buying pressure, which is a bearish sign.
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Chart 9
Chart 10 shows Google (GOOG) breaking down over the last two weeks. It all started with the gap down and declined below 620 on 22-February. The stock never recovered from this gap and broke below 600 today. Google also shows relative weakness. We dont always need an indicator to identify relative strength or weakness. The major index ETFs moved to new highs in mid February, but Google formed a lower high. A lower high in the face of higher highs reflects relative weakness.
