FINANCE SECTOR LEADS MARKET LOWER -- WELLS FARGO AND JP MORGAN WEIGH ON XLF -- AIRLINE INDEX GIVES BACK MOST OF PRIOR ADVANCE -- AIRLINES PUSH DOW TRANSPORTS BELOW APRIL LOWS -- UPS AND FDX LEAD TRANSPORTS LOWER
FINANCE SECTOR LEADS MARKET LOWER... Link for todays video. The finance sector led the market lower on Monday with another sharp decline. Chart 1 shows the Finance SPDR (XLF) moving below 15 to enter a potential support zone. Broken resistance and the 62% retracement mark potential support in the 14.75-15 area. Potential is the key word here because the finance sector has shown relative weakness the entire year (2011). While the S&P 500 rallied to a new high in early May, XLF did not even come close to its prior highs. XLF remains under enormous selling pressure and price action resembles a falling knife with the blade pointed down. We have yet to see any signs of firmness or a candlestick reversal to indicate that support in the 14.75 area may just hold. Chart 2 shows the Regional Bank SPDR (KRE) with potential support in the 24 area. KRE is holding up better than XLF, but still underperforming the broader market (SPY).
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Chart 1
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Chart 2
WELLS FARGO AND JP MORGAN WEIGH ON XLF... Citigroup (C) and Bank of America (BAC) led the finance sector lower on Monday. Citigroup is down around 25% from its January high and Bank of America hit a new 52-week low on Monday. The problems at these two banks are well publicized and price action suggests that there is no end in sight. Todays weakness comes after banking analyst Dick Bove downgraded Wells Fargo (WFC) to sell with a price target of $22. Judging from the price chart Bove is not the only one that rates it a sell. Chart 3 shows Wells Fargo breaking triangle support in early April and declining steadily the last two months. The 2010 lows are around 23 and this area marks the next potential support level. Resistance is set at 29, but this stock will likely need a period of basing before mounting a sustainable rally. WFC is the second biggest component (7.87%) in XLF.
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Chart 3
Chart 4 shows JP Morgan (JPM), the biggest component in XLF (9.21%), breaking double top support in May and moving into a retracement zone. The double top extends from 43 to 48 (5), which targets a move to around 38. The height of the pattern is subtracted from the support break for a target. Despite this target, there is a potential support zone around 40-41. This zone stems from the 50-62% retracements and broken resistance levels. As with XLF though, JPM shows no signs of firmness to reinforce this support zone.
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Chart 4
AIRLINE INDEX GIVES BACK MOST OF PRIOR ADVANCE... Airlines were hit hard after the International Transport Association reported that airline profits would be much lower than expected. According to the Association, high energy costs, unrest in the Middle East and the earthquake in Japan put a serious dent in airline profits. Chart 5 shows the Amex Airline Index ($XAL) tumbling over 2% on Monday. The index broke support from the mid May low with a decline at the end of May and then continued sharply lower the last four days. XAL has now given up over 70% of the April-May advance. A normal pullback within a bigger uptrend should be much shallower. The depth of this decline suggests that it is more than a mere pullback. Broken support just above 43.5 turns into the first resistance level to watch for signs to the contrary. Chart 6 shows the Airline ETF (FAA) with a breakout in early May. The ETF broke short-term support in mid May and moved back below the May breakout points. A strong breakout should hold. This one did not and airlines are back in bear mode.
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Chart 5
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Chart 6
AIRLINES PUSH DOW TRANSPORTS BELOW APRIL LOWS... The Airline industry is an important component of the Dow Transports. Air Freight companies, like FedEx (FDX) and United Parcel Service (UPS), are also getting hit hard. The Dow Transports is a price weighted index or average. This means the stocks with the highest prices have the highest weightings. As of Fridays close, FDX was the second largest component (9.65%) and UPS was the fifth largest (7.62%). You can find details on the Dow Averages at www.djaverges.com. Chart 7 shows the Dow Transports with a series of lower highs in May and then a breakdown over the last four days. The Average is down almost 5% in just four days. This decline exceeded the April low and the Dow Transports is starting to show relative weakness. The indicator window shows the Price Relative ($TRAN:$INDU ratio). The Transports were outperforming the Dow from early March to late May as the Price Relative rose. With a trendline break in early June, this economically sensitive barometer looks set to underperform now.
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Chart 7
UPS AND FDX LEAD TRANSPORTS LOWER... Chart 8 shows UPS testing its 2011 lows. The stock peaked in February, formed a lower high in early May and is on the verge of breaking support from the 2011 lows. UPS shows relative weakness because the major indices have yet to challenge their March lows. Chart 9 shows FedEx breaking the April lows with a gap and sharp decline over the last two days. FDX also formed a lower high in early May and shows relative weakness.
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Chart 8
