SHORT-TERM DOWNTRENDS WITHIN LONG-TERM UPTRENDS -- BREADTH INDICATORS HAVE YET TO BREAK DOWN -- RETAILERS BEAR BRUNT OF SELLING PRESSURE -- HD AND WMT BREAK SUPPORT AS AMZN TESTS SUPPORT -- OIL ETFS FORM BEAR FLAGS
SHORT-TERM DOWNTRENDS WITHIN LONG-TERM UPTRENDS ... Link for todays video. News this week was certainly not positive. The economic reports showed that the economy was slowing and the employment reports showed sluggish job growth. The week ended with non-farm payrolls increasing by 54,000 jobs in May, which was well below consensus. Stocks took big hits on Wednesday and were down again in early trading on Friday. Chart 1 shows the Russell 2000 ETF (IWM) falling the last five weeks with a falling channel taking shape. Five weeks can be considered a short-term trend. Taking a longer term horizon, the nine-month trend is clearly up with new 52-week highs in April. The ETF established a horizontal support line with the mid April and mid May lows (green dotted line). This line was broken last week and is under assault again this week. While a clear break would affirm the short-term downtrend, the January-March lows mark long-term support in the 77 area. In other words, this still looks like a correction within a bigger uptrend. At worst, the long-term trend right now could be considered flat and some sort of topping pattern is taking shape. IWM first moved above 80 in mid January and is currently trading just above 80. Prices have gone virtually nowhere the last 4-5 months.
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Chart 1
Chart 2 shows the Rydex S&P Equal Weight Index (RSP) in a long-term uptrend (9 months) and a short-term downtrend (5 weeks). The ETF is currently testing the April low, which marks the first support level to watch. Long-term, the March low marks a major support level. Relative to the S&P 500 ETF (SPY), RSP continues to outperform as the Price Relative trends higher. The constituents are the same in these two ETFs. SPY is weighted by market capitalization while RSP weights each issue equally. RSP represents a better cross-section of the stock market than SPY in my humble opinion (IMHO).
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Chart 2
BREADTH INDICATORS HAVE YET TO BREAK DOWN... When do we need to be concerned that this short-term downtrend is morphing into a bigger downtrend? That, of course, is the $64,000 question. Trend reversals and indicator signals occur in stages. Rarely does an index move from a long-term uptrend to a long-term downtrend in a few days or even a few weeks. It takes time to forge a top and then we need to see a major support break for confirmation. Market breadth can be used to assess the overall state of the market. Chart 3 shows the NY Composite ($NYA) with the AD Line and AD Volume Line. These three are shown with a 63-day EMA (one quarter). The bottom window shows the 10-day EMA of Net New Highs.
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Chart 3
With three breadth indicators, we can devise a system where at least 2 of the 3 provide an overall market assessment. Individually, bearish signals are generated when the AD Line and AD Volume Line move below their 63-day EMA and the 10-day EMA of Net New Highs turns negative. Cumulatively, an overall bearish signal is generated when two of the three are bearish. The opposite can be used for bullish signals. This is not a perfect system, but it can help one stay on the right side of the tape. There have been just two signals in the last 18 months: a bearish signal in May and a bullish signal in early July. Currently, the AD Volume Line moved below its 63-day EMA, but the AD Line remains above its 63-day EMA and the 10-day EMA of Net New Highs remains in positive territory. According to this system, only 1 of the 3 indicators is bearish. Note that the AD Line remains in a clear uptrend and recorded a new high on Tuesday. The next three charts show these indicators separately.
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Chart 4
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Chart 5
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Chart 6
RETAILERS BEAR BRUNT OF SELLING PRESSURE... With economic indicators and employment statistics coming up short this week, retail stocks have come under considerable selling pressure. Led by weakness in Wal-Mart and Home Depot, the Retail HOLDRS (RTH) is down some 7% the last few weeks. Chart 7 shows RTH breaking the trendline extending up from early September. RTH is clearly in a short-term downtrend with the next big support zone in the 102-104 area. As far as the long-term trend is concerned, note that a major topping pattern has yet to take shape. We have yet to see a Double Top, Head-and-Shoulders or some other distribution pattern. Moreover, we have yet to see a major support break. This means it is still too early to label the big trend down on this chart. Chart 8 shows the Retail SPDR (XRT) for reference.
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Chart 7
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Chart 8
HD AND WMT BREAK SUPPORT AS AMZN TESTS SUPPORT... Wal-Mart (WMT), Home Depot (HD) and Amazon (AMZN) are the three biggest holdings in RTH. Together, these three account for over 40% of the ETF. Wal-Mart is the biggest retailer in the world. Home Depot is influenced by the housing market. Amazon is the biggest internet retailer. These three are important indicators for the overall retail environment. Chart 9 shows Wal-mart breaking support from a small Head-and-Shoulders pattern. The stock also broke the trendline extending up from mid March. Also note that volume expanded on the support break. Chart 10 shows Home Depot falling off a cliff the last two weeks. HD broke triangle support and moved below its March low. The stock is currently oversold and ripe for a bounce or consolidation. Chart 11 shows Amazon testing support from the May lows. AMZN is actually holding up rather well today. A move below 190 would clearly break support and argue for a continuation of the May decline.
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Chart 9
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Chart 10
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Chart 11
OIL ETFS FORM BEAR FLAGS AFTER SHARP DECLINES... The next chart group shows three oil ETFs: the US Oil Fund (USO), 12-Month US Oil Fund (USL) and the Brent Crude ETF (BNO). The first (USO) is based on various NYMEX and WTI futures contracts over a 3 month period. The second (USL) is based on various NYMEX and WTI futures contracts over a 12 month period. The third (BNO) is based on Brent crude futures contracts. Brent crude comes from the North Sea and most goes to Europe. Unsurprisingly, all three act similar. After getting hit hard in early May, all three bounced back in the second half of the month. Rising flags took shape over the last few weeks and these short-term uptrends have yet to reverse. Watch flag supports (green lines) for a break that would signal a continuation lower.
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Chart 12
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Chart 13
