SMALL-CAPS LEAD THE MARKET HIGHER -- RETAIL SPDR SURGES TOWARDS FEBRUARY HIGH -- REGIONAL BANK SPDR BOUNCES OFF SUPPORT -- AIRLINE INDEX HITS SUPPORT FROM BROKEN RESISTANCE -- USING FIBONACCI CLUSTERS TO IDENTIFY SUPPORT
SMALL-CAPS LEAD THE MARKET HIGHER... Link for todays video. Small-caps led the surge on Monday and are at it again on Friday with another show of relative strength. Chart 1 shows the Russell 2000 ETF (IWM) surging over 35% from late August to late February. This move was pretty much straight up and there were no signs of significant weakness. After a 52-week high in late February, the ETF pulled back rather sharply, but held support from the January lows. This weeks bounce further affirmed support here. Chartists now have a clear and present support zone to watch. A move below the January-March lows would break this support zone and reverse the current uptrend. Those looking for an earlier signal can key off Mondays gap and Wednesdays spike low. A move below 79 would erase this gap and increase the chances of a bigger support break.
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Chart 1
The indicator window shows the Price Relative, which compares the performance of IWM (small-caps) relative to the S&P 500 ETF (large-caps). IWM outperformed from late August to late December as the Price Relative rose. There was a sudden 1-week drop in January, but the ratio quickly resumed its rise. Small-caps have been outperforming large-caps the last eight weeks. This is also positive for stocks. We can watch the late February and mid March lows for a reversal that would signal relative weakness in small-caps.
RETAIL SPDR SURGES TOWARDS FEBRUARY HIGH... The Retail SPDR (XRT) surged above short-term resistance over the last two days and is closing in on its February high. Chart 2 shows the ETF forming a falling wedge from late February to late March. Broken resistance turned into support and held throughout the month. The breakout over the last two days signals a continuation of the bigger uptrend. This is a positive development for the market overall. Estimates suggest that retail spending drives some 2/3 of the economy. According to www.spdrs.com, the Retail SPDR is a very broad ETF with over 90 retailers. Seems to me that they recently increased the number of holdings. With the biggest component weighing just 1.3%, this ETF is not dominated by a few big retailers. It is a true cross-section of the retail landscape. The Retail HOLDRS (RTH), on the other hand, is dominated by five biggies. Wal-mart (17.86%), Home Depot (14.27%), Amazon (11.43%), Target (7.62%) and Walgreen (7.13%) make up around 58% of this ETF. Chart 3 shows RTH breaking wedge resistance with a gap on Thursday. Also notice that MACD turned up and broke its signal line.
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Chart 2
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Chart 3
REGIONAL BANK SPDR BOUNCES OFF SUPPORT... The Regional Bank SPDR (KRE) moved sharply higher on Friday. Chart 4 shows KRE hitting support from its January low in mid March and moving above 26 today. The pink trendlines show a falling channel. I drew through the mid March low because it could be just an over-reaction to the events in Japan. Overall, the surge from early November to late January looks like an impulse move that is part of a larger uptrend. This means the 2011 consolidation may be the pause that refreshes. A move above the March highs would clear the way for a continuation of the December surge. The indicator window shows the Price Relative comparing KRE performance to the S&P 500. KRE has been relatively weak since January. A break above the March highs in the Price Relative would show a return to relative strength. Chart 5 shows the bigger banks in the Finance SPDR (XLF). XLF has been relatively weak since January and did not partake in this weeks rally. A convincing move above this weeks high is needed to suggest otherwise.
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Chart 4
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Chart 5
AIRLINE INDEX HITS SUPPORT FROM BROKEN RESISTANCE... The Amex Airline Index ($XAL) peaked in early November and has been under selling pressure throughout 2011. Rising oil prices likely contributed to the woes in this fuel intensive business. Chart 6 shows XAL plunging as oil prices spiked at the end of February. West Texas Intermediate Continuous Futures ($WTIC) surged from 85 to 105 and the index fell from 46 to 42. Even though the trend over the last few months is clearly down, support may be at hand as the index hits broken resistance. This is a key tenet of technical analysis: broken resistance turns into support. XAL broke resistance around 42 in September and returned to this level in late February. The index has actually been firming the last five weeks. A move above the channel trendline would be positive and a break above the early March high would reverse this downtrend.
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Chart 6
USING FIBONACCI CLUSTERS TO IDENTIFY SUPPORT ... It is sometimes difficult to select a specific high or low from which to draw the Fibonacci Retracements Tool. In particular, the Amex Airline Index has at least four reaction lows that chartists can use to base a retracement. Fortunately, there is only one high, the early November high. The Fibonacci Retracements Tool can be used to estimate potential support or reversal areas after an advance. Instead of picking just one level, chartists can apply the Fibonacci Retracements Tool to all levels and look for clusters. We are not looking for pinpoint levels when it comes to support or reversal points anyway. Instead, it is best to look for zones that serve as alerts to heighten chart awareness for other confirming signals. Applying the Fibonacci Retracements Tool to the May, July and August lows shows two clear cluster zones. The first is around 44 and the second around 42. The zone around 44 did not hold, but the zone around 42 is offering support. I would not use this as the sole tool to estimate support though. As noted above, I am also using broken resistance. Also notice that several momentum oscillators formed bullish divergences over the last few weeks, which suggests slowing downside momentum and a possible reversal.
