SMALL-CAPS LEAD OVERSOLD BOUNCE -- HOME CONSTRUCTION ETF FORGES BULLISH ENGULFING TOL FAILS TO BREAK OUT AS PMH REMAINS WEAK -- OIL AND GASOLINE ETFS GET OVERSOLD BOUNCES -- ENERGY SPDR BOUNCES OFF MARCH LOWS -- OIL SERVICE HOLDRS SETS A BEAR TRAP
SMALL-CAPS LEAD OVERSOLD BOUNCE FOR STOCKS... Link for todays video. Stocks moved higher on Wednesday, but the bounce was rather uneven and uninspiring. Small-caps led the way higher as the Russell 2000 ETF (IWM) gained over 1%. Large-caps lagged as the S&P 500 gained around a third of a percent. Sectors were mixed. Strong gains in energy (+1.69%) and materials (+1.41%) were watered down by miniscule gains in the consumer discretionary (+.03%) and finance (+.06%) sectors. The latter two sectors are much more important to the overall market. Chart 1 shows the Russell 2000 ETF staving off a support break with a bullish engulfing pattern on Wednesday. The ETF opened below 81 and closed at 82 to completely engulf the prior black candlestick. Despite this intraday reversal near the April low, IWM remains within a falling wedge and has yet to reverse the May downtrend. Follow though above the upper trendline (83) would confirm the bullish engulfing. A break above last weeks high at 84 would fully reverse the four week downtrend. Chart 2 shows the Dow Industrials SPDR (DIA) firming after Mondays gap. This gap has yet to be filled and DIA has yet to reverse the May downtrend.
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Chart 1
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Chart 2
HOME CONSTRUCTION ETF FORGES BULLISH ENGULFING... The Home Construction iShares (ITB) was one of the industry group leaders with a 1+ percent gain on Wednesday. Chart 3 shows the ETF within in a downtrend since mid January. The bigger picture makes this downtrend look like an extended correction, but we have yet to see a breakout or strong bullish catalyst. First, notice that ITB surged from 11.25 to 14.25 in December-January. Second, the ETF then embarked on a long slow decline that looks like an elongated wedge or pennant. There is support in the 12.75-13 area from the March and May lows. Support here is further affirmed with a bullish engulfing on Wednesday. Follow through above last weeks high would confirm this short-term pattern. As far as the bigger downtrend is concerned, a break above the April high is needed to signal a continuation of the December-January surge.
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Chart 3
Chart 4 shows the Homebuilders SPDR (XHB), which is a more diverse ETF that includes other stocks connected to the homebuilding industry. These include Home Depot (HD), Williams Sonoma (WSM), Pier 1 (PIR) and Mohawk Industries (MHK). XHB retraced 62% of the March-April advance with a falling wedge in May. The ETF also formed a bullish engulfing pattern on Wednesday. A follow through breakout above last weeks high would reverse the May downtrend.
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Chart 4
TOLL BROTHERS FAILS TO HOLD BREAK OUT AS PULTE REMAINS WEAK... As the stocks below show, the home building industry is not out of the doghouse just yet. Chart 5 shows Toll Brothers (TOL) surging above resistance intraday, but failing to hold its gain and finishing well below resistance. A close above this level is needed for a breakout. Alternatively, a break below the May lows would be a bearish development. Chart 6 shows Ryland (RYL) surging last week and then pulling back early this week. A triangle is taking shape and we should watch the boundaries for the next signal. Chart 7 shows Pulte (PHM) breaking support with a sharp decline in early May and then consolidating. A break above resistance at 7.8 is needed to reverse this downtrend.
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Chart 5
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Chart 6
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Chart 7
OIL AND GASOLINE ETFS GET OVERSOLD BOUNCES... John Murphy noted that oversold commodities and related stocks were getting a bounce on Tuesday. This bounce continued on Wednesday with the energy and materials sectors leading the market higher. Energy shares followed oil and gasoline prices higher. Chart 8 shows the 12-Month US Oil Fund (USL) surging above last weeks high with a rather strong gain on Wednesday. This breakout shows strength that could continue to the next resistance area around 48. Broken support and the 50-62% retracement zone mark resistance here. At this point, I would mark support at 44. USL must hold the breakout and surge to keep the bulls in charge. Concerns with strength in the Dollar and recent weakness in stocks remain. The US Dollar Fund (UUP) broke the January trendline this month. A rising Dollar could ultimately weigh on oil. Stocks have been weak the entire month of May.
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Chart 8
Chart 9 shows the US Gasoline Fund (UGA) also getting a bounce the last few days. Chartists need to watch that this bounce does not evolve into a bear flag or wedge. A break below 48 would argue for a continuation of the early May decline.
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Chart 9
ENERGY SPDR BOUNCES OFF MARCH LOWS... Chart 10 shows the Energy SPDR (XLE) bouncing off the March lows wit a surge above 75 on Wednesday. The ETF first bounced off the 73 area last week. After a pullback on Friday, XLE again bounced with a long white candlestick today. This move reinforces support in the 73 area. Last week I commented on the double top support break around 75 (green dotted line). This support break is being challenged with todays surge. I am leaving resistance at 77 though. Follow through above this level would suggest more than an oversold bounce and XLE could then challenge the prior highs.
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Chart 10
OIL SERVICE HOLDRS SETS A BEAR TRAP... Chart 11 shows the Oil Service HOLDRS (OIH) with an even bigger surge on Wednesday. This surge looks more impressive because of the doji and strong move back above 150. Notice the two doji between 145 and 147.5. These signal indecision or support. Also notice that the ETF consolidated around 147.5 for over two weeks as the bulls fought the break below the March lows. With a move back above 150, OIH is setting what could be a bear trap or failed support break. Follow through above broken resistance and the 10-May reaction high would be most impressive.
