SPY CHALLENGES NECKLINE RESISTANCE -- MID-CAPS AND SMALL-CAPS CONTINUE SHOWING RELATIVE STRENGTH -- FINANCE AND TECHNOLOGY LAG AS DEFENSIVE SECTORS LEAD -- PERCENT OF STOCKS ABOVE 50-DAY SMA REMAINS BULLISH
SPY CHALLENGES NECKLINE RESISTANCE... Link for todays video. With last weeks surge back to the February highs, the S&P 500 ETF (SPY) has traced out an inverse head-and-shoulders. These patterns can form as continuation or reversal patterns. An inverse head-and-shoulders pattern after an extended advance is viewed as a bullish consolidation. A break above neckline resistance signals an end to the consolidation and a resumption of the ongoing uptrend. Notice how the ETF formed relatively equal shoulders in the 129-129.5 area and a clear resistance zone in the 133-134 area. The right half of the pattern shows a surge, shallow pullback and move back to resistance. The higher low of the right shoulder shows buying interest coming in sooner rather than later. Shoulder support and neckline resistance are the next important levels to watch. There was also an inverse head-and-shoulders pattern from mid May to mid September. This pattern formed after a decline, which made it a reversal pattern.
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Chart 1
The indicator window shows 14-day RSI with horizontal lines at 35 and 65. These may seem like atypical levels for RSI, but they help define the trend bias. Notice how RSI moved below 35 several times from early May to early July and failed to break above the 65 level. RSI (momentum) has a bearish bias when it breaks below 35 and subsequently remains below 65. This bearish bias ended with the break above 65 in mid September, which coincided with the neckline breakout. RSI moved into bull mode and subsequently held above 35 until a brief break in mid March (red arrow). This break was so brief and the recovery so strong that it looks like a whipsaw (bear trap, bad signal, head fake). Even though RSI moved back above 50 twice in the last few weeks, it has yet to reclaim the 65 level and momentum is lagging as SPY trades back near its February highs. I still give the bulls the benefit of the doubt though and will wait for another break below 35 before thinking otherwise.
MID-CAPS AND SMALL-CAPS CONTINUE SHOWING RELATIVE STRENGTH... There will always be leaders and laggards among the major index ETFs and the sectors. The key is the weigh the balance of evidence to determine a trading bias. I count five major index ETFs that are key to the overall trend for the stock market. The S&P 500 ETF (SPY), Dow Industrials SPDR (DIA), S&P MidCap 400 SPDR (MDY), Russell 2000 ETF (IWM) and Nasdaq 100 ETF (QQQ) cover the major areas of the stock market (large-caps, the Dow Industrials, mid-caps, small-caps and large techs). With an odd number, there will almost always be a clear bullish or bearish bias with a simple majority. The bulls have the edge when 3 are bullish and the bears when 3 are bearish.
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Chart 2
Chart 2 shows three of the five major index ETFs moving above their February highs. There have been two surges since mid March. The first surge extended from mid March to early April and the second surge occurred last week. This second surge appears to be a work in progress so I will focus on the first surge for now. Using some basic trend analysis, we can see that the Dow Industrials SPDR, Russell 2000 ETF and S&P MidCap 400 SPDR broke their February highs and recorded new 52-week highs early this month. The Nasdaq 100 ETF and the S&P 500 ETF have yet to confirm with corresponding breakouts. These two non-confirmations are potentially negative, but the three confirmations are currently positive.
FINANCE AND TECHNOLOGY LAG AS DEFENSIVE SECTORS LEAD... Using Candleglance charts for the nine sectors, chartists can quickly view and compare performance for the key sectors. Chart 3 shows four Candleglance charts for the offensive sectors (finance, industrials, technology and consumer discretionary). For obvious reasons, the performance of these stocks is important to the health of the market. Finance represents the banking system. Industrials represent the backbone of the economy. Technology represents growth. Consumer discretionary represents consumer spending. There is some cause for concern when looking at these four charts. Currently, only the Industrials SPDR (XLI) and the Consumer Discretionary SPDR (XLY) exceeded their February highs this month. The Technology ETF (XLK) got a nice gap and breakout last week, but the Finance SPDR (XLF) remains a serious laggard.
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Chart 3
Chart 4 shows the three defensive sectors (consumer staples, utilities and healthcare). The surge in the Consumer Staples SPDR (XLP) and the Healthcare SPDR (XLV) has been quite impressive since mid March. John Murphy pointed out relative strength in these two last week. Both broke their February highs in late March and continued sharply higher in April. Relative strength in these two defensive sectors is potentially negative for the broader market because it shows a preference for defense over offense.
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Chart 4
Materials and energy represent the last two sectors. As John pointed out last week, these two sectors normally perform best in the latter stages of a bull market. Chart 5 shows both in strong uptrends and new 52-week highs in early April. The Energy SPDR (XLE) and the Basic Materials SPDR (XLB) were hit hard in early April, but bounced back with gaps last week. The April lows now mark important support levels for both.
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Chart 5
PERCENT OF STOCKS ABOVE 50-DAY SMA REMAINS BULLISH... The percentage of stocks above the 50-day moving average is a breadth indicator designed to measure the degree of participation. In general, this indicator has a bullish bias when above 50%, which means that more than half of the index components are above their 50-day SMAs. Conversely, a bearish bias exists when below 50%. While the 50% line provides a clear bullish or bearish bias, I like to add a buffer to these thresholds by requiring a move above 55% to be bullish and a move below 45% to be bearish. This reduces whipsaws by requiring a little extra strength or weakness to generate a signal.
Chart 6 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) plunging below 45% on March 14th and then surging above 55% on March 29th. This surge put breadth back on bullish footing. Last weeks market surge pushed the indicator above 75% for the first time since mid February.
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Chart 6
Chart 7 shows the S&P 500 %Above 50-day SMA ($SPXA50R) plunging below 45% on March 15th and then right back above on March 24th, a mere seven trading days later. Whipsaws are unavoidable and will happen with any indicator, especially oscillators. Last weeks late surge carried the indicator from 50% to 72.5% in just three days. This shows strong participation in last weeks rally. Breadth favors the bulls until there is a counter signal with a move below 45%.
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Chart 7
BREADTH SYMBOLS... This indicator is available for seven different indices and three different moving averages. The table below shows the various symbols. Click on the image to see this list in the symbol catalog.
