SPY GAPS LOWER TO FORGE ISLAND REVERSAL -- TREASURIES BOUNCE AS STOCKS WEAKEN -- AGGREGATE AND CORPORATE BOND ETFS FOLLOW TREASURIES -- AEROSPACE-DEFENSE ETF BREAKS DOWN AFTER BEARISH DIVERGENCE -- GENERAL DYNAMICS, LOCKHEED AND RAYTHEON PLUNGE
SPY GAPS LOWER TO FORGE ISLAND REVERSAL... Link for todays video. With a pair of opposing and overlapping gaps, the S&P 500 ETF (SPY) formed an island reversal over the last few weeks. First, chart 1 shows the ETF gapping above 132 with a surge on March 30th. Second, the ETF traded between 132.13 and 134 the next nine days. Third, the ETF gapped below 132 on Tuesday. With these two gaps, there were no trades around 132, which means buyers during the nine-day range are stuck on the island with losses. SPY made an attempt to fill the gap with a strong open on Wednesday, but selling pressure took hold and pushed the ETF back down. This island reversal is short-term bearish until proven otherwise. What would that take? Namely, the ETF needs to fill the gap. A move above 132.5 would recapture this gap zone and invalidate the island reversal.
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Chart 1
The indicator window shows StochRSI moving below .20 as the ETF gapped below 132. This indicator is the Stochastic Oscillator applied to RSI, which makes it an indicator of an indicator. Put another way, it is like RSI after drinking three Red Bulls. Yep, it is a bit hyper. As with many momentum oscillators, momentum favors the bulls when above the centerline and the bear when below the centerline. There will be whipsaws, like in January, but there are also some pretty good short-term trends. Look for StochRSI to surge above .50 to turn short-term momentum bullish again.
TREASURIES BOUNCE AS STOCKS WEAKEN... Bond performance continues to be tied to stock performance. This jibes with John Murphys intermarket assessment when deflationary forces rule the roost. Stocks and bonds have a positive relationship in an inflationary environment, but an inverse relationship in a deflationary environment, such as now. The big question remains: when will the stock-bond relationship switch from inverse (deflationary) to positive (inflationary). Ill save that one for another time or defer to John. For now, I will respect the inverse relationship until proven otherwise.
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Chart 2
Chart 3 shows the 20+ year Bond ETF (TLT) with a clear inverse relationship to stocks. TLT declined until early February as stocks moved higher. TLT bounced from mid February to mid March as stocks corrected rather sharply. TLT has moved back down as stocks rebounded the last few weeks. With stocks turning lower the last few days, bonds attracted buying pressure and bounced. Fundamentally, this bounce may be tied to the non-shutdown of the US government and recent proposals to reduce the deficit. TLT surged to the upper trendline of a falling flag. A trendline break would be positive and a break above the early April high would argue for further strength above the March high. This, of course, depends on stock market performance in the coming days or weeks. Chart 4 shows the 7-10 year Bond ETF (IEF) with similar characteristics.
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Chart 3
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Chart 4
AGGREGATE AND CORPORATE BOND ETFS FOLLOW TREASURIES... Unsurprisingly, the iShares Aggregate Bond ETF (AGG) and the Investment Grade Corporate Bond ETF (LQD) both followed Treasuries higher on Wednesday. The Aggregate Bond ETF is a mishmash of investment grade bonds that include Treasuries (32%), Mortgage-Backed Securities (32%), Corporate Bonds (17%), Agency Debt (8%) and other. Chart 5 shows the ETF establishing support in the 103.25 area with two bounces in December-February and broke resistance in March. After a pullback the last few weeks, the ETF surged above wedge resistance with a strong bounce the last two days. Key support is now set at 104.5. Chart 6 shows the Investment Grade Corporate Bond ETF (LQD) moving higher since the mid December low. The ETF also bounced over the last two days and key support is set at 107.50.
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Chart 5
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Chart 6
AEROSPACE-DEFENSE ETF BREAKS DOWN AFTER BEARISH DIVERGENCE... A recent proposal to cut defensive spending weighed on defense stocks on Wednesday. Chart 7 shows the Aerospace-Defense ETF (PPA) hitting resistance from the February high and moving sharply lower the last four days. While the ETF basically equaled its February high, MACD formed a lower high, which is a bearish divergence for momentum. This divergence was confirmed as MACD moved below its signal line. Also notice that the MACD-Histogram moved below zero. This reflects the bearish signal line crossover in MACD. Taking a bigger view, a double top is in the making with support based on the March low. A break below this low would confirm the double top and project further weakness towards the November lows.
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Chart 7
GENERAL DYNAMICS, LOCKHEED AND RAYTHEON PLUNGE... Chart 8 shows General Dynamics (GD) gapping down at the beginning of the month and breaking support with a sharp decline today. The indicator window shows the directional movement trio from Welles Wilder (Minus Directional Indicator, Plus Directional Indicator and Average Directional Indicator). DI (red) moved above +DI (green), which is bearish. Also notice that ADX (black) is turning up from low levels, which indicates that a trend may be taking hold (blue arrows). +DI and DI provide the directional bias. ADX simply tells us the strength of the overall trend. Notice that a strong trend developed with the ADX upturn in mid December. You can read more on this indicator in our ChartSchool Article
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Chart 8
Chart 9 shows Lockheed Martin (LMT) moving sharply lower and testing support around 78. DI surged above 20 and to its highest level since early December. Chart 10 shows Raytheon (RTN) testing support around 49 after a sharp decline the last four days. DI surged to its highest level of the year.
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Chart 9
