BROKEN RESISTANCE TURNS INTO FIRST SUPPORT FOR SPY -- QQQ TURNS INDECISIVE ABOVE RESISTANCE -- SMALL-CAPS SHOW RELATIVE WEAKNESS -- SIX-MONTH CYCLE TURNS BEARISH IN MAY -- NIKKEI SURGES AS SHANGHAI TESTS SUPPORT
BROKEN RESISTANCE TURNS INTO FIRST SUPPORT FOR SPY... Link for todays video. Broken support turns into resistance. This is a basic tenet of technical analysis. Chartists can reverse the rolls because broken resistance turns into support as well. With a big surge the last two weeks, the S&P 500 ETF (SPY) recently broke resistance from an inverse head-and-shoulders pattern. Chart 1 shows the ETF surging to resistance with a big gap, stalling for a few days and then surging above 136 last week. Broken resistance around 133-134 turns into the first support level to watch now. In technical analysis lingo, a decline back to broken resistance would be called a throwback. These post-breakout throwbacks are fairly common with head-and-shoulders breakouts. As far as the big trend is concerned, we can now mark support near the mid April lows. A clear reaction low formed here as the ETF surged over 5% from its low. There is also a trendline extending up from the late November low. These two combine to mark support at 129-130. A break below this level would reverse the uptrend that has been in place since late August. Chart 2 shows the Consumer Discretionary SPDR (XLY) with a similar pattern over the last few months. As the most economically sensitive sector, we should watch it closely for clues on market performance.
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Chart 1
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Chart 2
QQQ TURNS INDECISIVE ABOVE RESISTANCE... Large technology stocks, as represented by the Nasdaq 100 ETF (QQQ), stalled out over the last three days. Chart 3 shows QQQ surging above its February high and then forming three indecisive candlesticks with small bodies, which define the movement from open to close. A small body means there was little movement after the open. In contrast, a long body shows decisive movement after the open. A long white candlestick (hollow) shows a strong advance and close after the open. A long black candlestick (filled) reflects weakness with a strong decline and close after the open. At this stage, QQQ is holding above its February high and indecision has yet to turn into actual weakness. Indecision means there is standoff between buyers and sellers. A move below 58.5 would tilt the short-term edge towards the sellers and signal a correction of the recent surge.
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Chart 3
SMALL-CAPS SHOW RELATIVE WEAKNESS ... Even though the Russell 2000 ETF (IWM) zoomed to a new high last week, the Price Relative did not follow suit and small-caps are starting to show some relative weakness. Chart 4 shows IWM with the Price Relative (IWM:SPY ratio) in the indicator window. This ratio rises when IWM outperforming and falls when IWM underperforms. Notice how IWM exceeded its early April high, but the Price Relative did not. This is a small bearish divergence for relative strength. We are also seeing some relative weakness in todays market action as IWM opened strong and moved lower to form a bearish engulfing. This chart was snapped about an hour before the close so it is still subject to change. A bearish engulfing or outside reversal would be short-term negative. Like the indecisive candlesticks in QQQ, this bearish engulfing increases the chances of a short-term pullback after becoming overbought.
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Chart 4
SIX MONTH CYCLE TURNS BEARISH IN MAY... According to the Stock Traders Almanac details, the six-month cycle is bullish from November to April and bearish from May to October. This is where the axiom, Sell and go away in May comes from. Investors buying stocks on November 1st and selling on April 30th would have vastly outperformed buy-and-hold over the last 60 years. More over, this outperformance would have come with half the risk because money would be in cash equivalents from May to October. Chart 5 shows the S&P 500 with the start of the bullish six-month cycle in green and the start of the bearish six-month cycle in red.
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Chart 5
It does not make sense to follow cycles blindly. Even though the bearish cycle starts today, there is no denying the current uptrend as the S&P 500 recorded a fresh 52-week high just last month. Chartists should employ other tools to identify a trend change for bearish confirmation. Sy Harding added his own twist to the system by requiring MACD confirmation. The bullish cycle is confirmed when MACD crosses from negative to positive territory, while the bearish cycle is confirmed when MACD crosses from positive to negative. This MACD system is certainly not fool proof and there will be loosing trades. However, back-tests to 1950 reveal this system as winner more often than not. Chart 6 shows the S&P 500 with two moving averages and MACD. The 13-day EMA remains above the 34-day EMA and MACD remains in positive territory. Even though the bearish cycle has started, prices are not showing any weakness and I would watch these indicators for signs. Also note that the index established an important low in April and a break below this low would be bearish.
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Chart 6
NIKKEI SURGES AS SHANGHAI TESTS SUPPORT... After a consolidation most of April, the Nikkei 225 ($NIKK) resumed its rebound with a break above the early April high. Chart 7 shows the index with a selling climax in mid March and a rebound in the second half of the month. The index stalled after retracing 50-62% of the prior decline. Another test of support was possible in early April, but the Nikkei resumed its advance with a little wedge breakout seven days ago and a move above the April high the last two days. The next resistance zone is around 10200 from broken support. The April low now marks key support at 9400.
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Chart 7
While the Nikkei moved higher the last two weeks and broke resistance, the Shanghai Composite ($SSEC) moved lower and tested support. Chart 8 shows the index breaking the wedge trendline with a sharp decline from mid April. The index finally firmed near the mid March lows with small gains on Friday and Monday. This is an important support test. Failure to hold the mid March lows would be bearish for one of the worlds most important indices. The indicator window shows the Shanghai Composite relative to the S&P 500. Shanghai was outperforming from late January to mid April, but turned into an underperformer the last two weeks.
