INDUSTRIALS SPDR AND S&P MIDCAP SPDR BOUNCE OFF APRIL LOWS -- REAL ESTATE ISHARES FORMS BULL FLAG -- DOW INDUSTRIALS FIRMS AT POTENTIAL INFLECTION POINT -- DOW TRANSPORTS SHOWS RELATIVE STRENGTH -- NATURAL GAS SURGES OFF MARCH-APRIL LOWS
INDUSTRIALS SPDR AND S&P MIDCAP SPDR BOUNCE OFF APRIL LOWS... Link for todays video. Basic trend analysis stipulates that an uptrend consists of rising peaks and rising troughs. The trick, as always, is picking the right peaks and trough upon which to base the trend. The most recent trough becomes support upon which the uptrend depends. A break below this trough argues for the beginning of a downtrend. Most charts show two distinct troughs or reaction lows in 2011: mid March and mid April. Chart 1 shows the Industrials SPDR (XLI) with these two lows. Considering the new high on May 2nd, the big trend here is clearly up. But where do we mark key support?
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Chart 1
The February-March decline was much deeper than the early April decline. Therefore, the March lows are deemed more important than the April lows. This March low could be considered long-term support. The April lows formed as part of an advance that extended from mid March until the end of April. The decline was fairly deep and did produce a clear reaction low. This low could be considered medium-term support. There is definitely a support level here that warrants our attention. Also notice that XLI formed a piercing pattern on Wednesday and moved higher on Thursday. This reinforces support in the 36.5 area. More follow through is needed to break the falling flag though. Chart 2 shows the S&P MidCap 400 SPDR (MDY) with similar characteristics.
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Chart 2
REAL ESTATE ISHARES FORMS BULL FLAG... There are many charts with falling flags for the month of May. Some of these flags look more like wedges because their lines are not exactly parallel. We cannot expect every pattern to be picture perfect. In fact, picture perfect patterns are more the exception than the norm. Markets, after all, are driven by the emotions of fear and greed. Prices tend to overshoot at times and undershoot at other times. Chartists must ask themselves if the essence of the pattern is there. What is the essence of a falling flag? First, there is a sharp advance. Second, there is a choppy 1-4 week pullback that marks a correction. Third, a break above flag resistance signals a continuation of the prior advance. In short, falling flags are bullish consolidations that form after a sharp advance. Chart 3 shows the Real Estate iShares (IYR) with one of the more picture-perfect flags. IYR hit support near broken resistance and the mid December trendline. The ETF also filled Mondays gap with a long white candlestick on Thursday. With a breakout in the making, the upside target is in the 64.5-65 area. Flags are said to fly at half-mast. The pole is around 4.5 points. This is added to the flag low for a target.
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Chart 3
DOW INDUSTRIALS FIRMS AT POTENTIAL INFLECTION POINT ... Chart 4 shows the Dow Industrials with a long skinny flag this month. The bulls have three things going for them on this chart. First, the Dow recorded a new 52-week high just four weeks ago and the bigger trend is up. Second, the senior Average moved sharply lower on Monday and then firmed around 12300-12400 the last few days. Third, this area marks a support zone from broken resistance. The combination of support and firmness means the Dow could be at an inflection point. A bullish catalyst is needed to signal the end of the May decline and a resumption of the bigger uptrend. A strong surge and/or flag breakout would provide such a catalyst. Without a catalyst, this decline should at least be respected.
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Chart 4
DOW TRANSPORTS SHOWS RELATIVE STRENGTH ... While many indices moved to new lows for the month this week, chart 5 shows the Dow Transports holding above last weeks low and showing relative strength. The pattern in May looks like a fat flag. Notice that the Average surged above 5500 and then corrected with a choppy decline the last four weeks. A move back above 5500 would reverse this four week decline. The indicator window shows the $TRAN:$INDU ratio bottoming at the beginning of March. This means the Dow Transports has been outperforming the Dow Industrials for almost three months. The ratio hit a four month high this week as the Dow Transports continue to show relative strength.
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Chart 5
NATURAL GAS SURGES OFF MARCH-APRIL LOWS... After a long downtrend, Natural Gas shows signs of life with a base that could lead to a breakout. Natural Gas futures declined from 13 in June 2008 to 3 in August 2009. Trading was quite wild in 2009, but then settled down later in 2010. Overall, chart 6 shows Natural Gas Continuous Futures ($NATGAS) consolidating around the 4.25 area for a year now. This looks like a base of some sorts. Also notice that a falling wedge following the surge and the wedge low held above the 2009 low. $NATGAS broke above the wedge trendline and then held above the wedge low this year. The 2011 highs mark a major resistance level to watch. A break above these highs would be bullish for natural gas.
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Chart 6
Chart 7 shows the US Natural Gas Fund (UNG) surging off support from the April-May lows. Again, a higher low formed as the ETF held above the March low the last two months. UNG would obviously benefit if natural gas prices move higher. There is also a 12-Month US Natural Gas Fund (UNL). It is important to understand the construction of these ETFs and their correlation to the underlying commodity. There are also issues surrounding natural gas found in shale formations.
