JOBS REPORT GIVES SPY A BOUNCE OFF BROKEN RESISTANCE -- CONTINUING UPTREND IN BONDS TARGETS 2010 HIGHS -- VOLATILITY CONTRACTS AS TRADING RANGES EXTEND FOR XLF AND KRE -- HOME CONSTRUCTION AND STEEL ETFS CONSOLIDATE WITH RELATIVE WEAKNESS
JOBS REPORT GIVES SPY A BOUNCE OFF BROKEN RESISTANCE... Link for todays video. After a breakout and 52-week high for the S&P 500 ETF (SPY) last week, it was pretty much all down hill this week. SPY opened strong on Monday, but selling pressure quickly took over and lasted until Thursday. Technical conditions were ripe for at least a bounce as SPY hit support from broken resistance and became short-term oversold. Todays jobs report provided the fundamental backdrop for the Friday morning bounce. The Labor Department reported that non-farm payrolls grew 244,000, which was better than expected. Despite a strong open, buying pressure subsided and stocks moved lower in the afternoon. Chart 1 shows SPY breaking resistance last week and returning to broken resistance this week. The ETF firmed on Thursday and bounced on Friday. A strong breakout should hold. Further weakness below 133 would be negative. I am leaving key support at 129, which is confirmed by the late November trendline and the mid April low. I am also watching RSI has it bounces off the 50 area. The 40-50 zone held in mid April and it is important that is holds again here in May.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) falling sharply Monday to Wednesday and then firming with an inverted hammer on Thursday. The ETF also bounced Friday morning with the jobs report, but fell back after the initial euphoria. This is the second time in five days that stocks surged on initial euphoria, failed to follow through and closed below the open. Monday, of course, was the bin Laden bounce. The inability to move higher in the face of good news suggests that buying pressure is drying up. IWM has lots of support in the 81-82 area from the April low. We need to watch this support level in the coming days and weeks.
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Chart 2
CONTINUING UPTREND IN BONDS TARGETS 2010 HIGHS... Bonds reacted negatively to the jobs report with a sharply lower open. However, bonds managed to bounce and close well above their morning lows. Bonds show resilience and stocks show lethargy. Overall, bonds maintained their big uptrends with higher lows in February and a strong advance the last 12 weeks. Chart 3 shows the 7-10 year T-Bond ETF (IEF) hitting a new 52-week high in the third quarter of 2010. Despite a sharp decline from this high, the ETF held above support from the June-2010 trendline and broken resistance. This higher low kept the big uptrend intact. Bonds surged over the last four weeks and got a big boost this week from weakness in stocks and commodities. As John Murphy noted on Thursday, the 10-year Treasury Yield ($TNX) and the S&P 500 currently have a positive relationship. This means stocks and bonds have a negative relationship. Stocks fall as bonds rise and visa versa. At this stage, it looks like IEF is on tract to challenge its 2010 high. Such a move would imply further weakness in stocks and commodities. The indicator window shows the IEF:SPY ratio. The trouble for stocks starts when/if this ratio turns up and breaks its mid March high. This would show bonds outperforming stocks. Chart 4 shows the 10-20 Year T-Bond Fund (TLH) with a similar pattern at work.
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Chart 3
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Chart 4
VOLATILITY CONTRACTS AS TRADING RANGES EXTEND FOR XLF AND KRE... Volatility contractions in the Finance SPDR (XLF) and the Regional Bank SPDR (KRE) suggest we might get a move sooner rather than later. Decisive moves in these two would no doubt affect on the broader market. But which way? From Bollinger Bands, we know that periods of low volatility are often followed by periods of high volatility, or at least higher volatility. A narrowing of the bands reflects decreasing volatility. Unfortunately, the bands do not provide directional clues. Chartists must turn to the bigger trend or key indicators for a trend bias. The next four weekly charts show key ETFs within extended consolidations. We should watch these closely for two reasons. First, the direction of the break will have consequences for the broader market. Second, consolidation breaks could lead to significant price moves.
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Chart 5
Both KRE and XLF are in slight uptrends, but both show relative weakness in 2011. While the S&P 500 and Dow worked their way higher this year, XLF and KRE have been stuck in consolidations since January. These two did not participate in the 2011 market advance. Put another way, KRE and XLF show relative weakness. Score one for the bears. Despite relative weakness this year, both appear to be in slight uptrends. Chart 5 shows XLF recording a 52-week high earlier this year and remaining close to resistance. Chart 6 shows KRE forging a 52-week high in May 2010, correcting with a falling wedge and continuing higher late last year. Score one for the bulls.
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Chart 6
Relative weakness in 2011 favors the bears, but the overall trends favor the bulls. At this point, chartists are simply dependent on the consolidation break for a clear directional clue. Choppy price action within these consolidations is of little consequence. XLF surged from 6 to 14 and then moved into a large consolidation that extends back to August 2010. The ETF is currently consolidating near the top of this consolidation with a very tight range (15.60 to 17.20). These are the levels to watch for a move of significance. KRE surged at the end of 2010 and started a tight consolidation in late December. Support resides at 25 and resistance at 27.5. These are the levels to watch for a significant break.
HOME CONSTRUCTION AND STEEL ETFS CONSOLIDATE WITH RELATIVE WEAKNESS... Relative weakness and consolidations are also present in the Home Construction iShares (ITB) and the Steel ETF (SLX). While these two industry groups may not be closely related, their price patterns for 2011 are similar. Chart 7 shows ITB surging at the end of 2010 and then moving into a consolidation throughout 2011. ITB did not participate in the broad market advance this year and has been stuck between 12.80 and 13.90 the last 10 weeks. Watch these boundaries for a significant break. Chart 8 shows SLX also surging at the end of 2010 and then moving into a consolidation throughout 2011. Support is at 67.5 and resistance at 77.5.
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Chart 7
