SETTING DOWNSIDE TARGETS FOR SPY AND QQQ -- AD VOLUME LINES FORM LARGE DOUBLE TOPS -- NASDAQ NET NEW HIGHS TURN NEGATIVE -- DOLLAR SURGES TO FORM HIGHER LOW -- STRENGTH IN THE DOLLAR WEIGHS ON GOLD -- OIL DROPS ON TRIPLE WHAMMY
SETTING DOWNSIDE TARGETS FOR SPY AND QQQ... The S&P 500 ETF (SPY) is in the midst of a correction within a bigger uptrend. One look at a chart 2 year chart confirms this uptrend. In fact, the decline of the last six weeks looks rather mild when compared to the gains since July 2009 or March 2009. Chart 1 shows that S&P 500 ETF (SPY) with a 61% gain since July 2009 and a 35% gain since July 2010. Hmmm, the last two bottoms occurred in July. The current decline started with a dark cloud on the first week of May. From the peak at around 137, SPY is down around 6.8%. Moreover, this decline is still a work in progress because we have yet to see a selling climax or any kind of breakout to suggest the decline has ended. At this point, it is prudent to map out a few correction scenarios. How far could this correction extend? The March lows mark the most obvious targets around 125. The second target is around 120. The July-09 trendline and broken resistance confirm support here. I have also overlaid the Fibonacci Retracements Tool for some potential support markers. The 38% retracement falls in between the two support levels suggested. Regardless of these targets, a correction is not going to end until we get some sort of reversal pattern or breakout. The 2010 correction show examples of breakout ended corrections. The March 2011 correction ended with a weekly hammer and upside follow through above 130. At this point, we simply have to keep these targets in mind and wait for a reversal or breakout to end this correction.
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Chart 1
The indicator window shows RSI moving into the 40-50 zone. In an uptrend, this zone acts as support. RSI typically trades between 40 and 80 when the market is in bull mode. Conversely, it trades between 20 and 60 when in bear mode. RSI held the 40-50 zone in July 2009 and May-August 2010. Further weakness towards 125 would push RSI into this zone for its third test. Chart 2 shows the Nasdaq 100 ETF (QQQ) with similar characteristics.
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Chart 2
AD VOLUME LINES FORM LARGE DOUBLE TOPS... Cumulative indicators, such as the AD Line and AD Volume Line, can form chart patterns just like a normal price chart. Chartists can apply indicators, draw trendlines and identify chart patterns. The next two charts show the NYSE AD Volume Line and the Nasdaq AD Volume Line with large double tops forming in 2011. These are bearish reversal patterns that require confirmation. Both formed relatively equal highs in February and May. The March low marks the intermittent low for key support. A break below this low would confirm the double tops and reverse the uptrends in the AD Volume Lines. Such a bearish development in these breadth indicators would weigh on the stock market.
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Chart 3
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Chart 4
The indicator window shows 50-day EMAs for the AD Volume Ratio, which is Net Advancing Volume divided by Total Volume. The AD Volume Ratio fluctuates above and below the zero line on a regular basis. These positive/negative fluctuations mean a moving average will form a natural oscillator. This gives the AD Volume Line momentum, which increases sensitivity and signal frequency. Notice how the 50-day EMA of the NYSE AD Volume Ratio bottomed in July and rose with a series of higher highs until December. A lower high formed in February and the indicator has been trending lower the entire year. Momentum for the AD Volume Line is clearly negative. The indicator turned negative in May and broke below its March low in June. A move above the late May high is needed to reverse the downtrend here. Such a breakout would likely put the Double Top in the AD Volume Line on hold.
NASDAQ NET NEW HIGHS TURN NEGATIVE ... The rank-and-file stocks in the Nasdaq have born the brunt of recent selling pressure. We can see this when comparing the Nasdaq AD Line with the NYSE AD Line or Nasdaq Net New Highs with the NYSE Net New Highs. Chart 5 shows the Cumulative Net New Highs Line for the Nasdaq moving below its 10-day EMA for the second time in four weeks. The indicator window shows Nasdaq Net New Highs dipping to their lowest reading since August. This means new 52-week lows are expanding as new 52-week highs contract. Even though the Nasdaq remains above its March low, Net New Highs dipped below their March low as more stocks weakened in June. Expanding participation on the downside is negative for the Nasdaq.
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Chart 5
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Chart 6
Chart 6 shows that NYSE Net New Highs were not immune to the decline of the last six weeks. The Cumulative Net New Highs Line is barely above its 10-day EMA and Net New Highs finished at zero on Thursday. Net New Highs dipped into negative territory in late May and once in early June. It would not take much to push the Cumulative Net New Highs Line below its 10-day EMA for the first time since early July. This would be a negative for market breadth.
DOLLAR SURGES TO FORM HIGHER LOW... The Dollar surged on Friday as the Euro plunged. Chart 7 shows the US Dollar Fund (UUP) within a downtrend since June 2010, which is just before the stock market bottomed. Even though this downtrend remains, chartists should be vigilant for a potential trend reversal. UUP formed a big bullish engulfing the first week of May and surged above 21.5 later in the month. After a two week pullback, the greenback firmed this week and could be forming a higher low. There is a clear resistance level from the May high. A move above this level would also break the June 2010 trendline. The first target on such a breakout would be resistance in the 23-23.5 area. The indicator window shows RSI becoming oversold in September-October 2010 and again in April 2011. A higher low formed in RSI and a break above 50 would be bullish for momentum.
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Chart 7
STRENGTH IN THE DOLLAR WEIGHS ON GOLD... Gold could be forming a lower high as the Dollar forms a higher low. Chart 8 shows the Gold SPDR (GLD) in a long-term uptrend, but a lower high could be forming just below the May high. First and foremost, keep in mind that the big trend is clearly up here. Therefore, turning bearish now would be a top picking exercise. A rising price channel has taken shape over the last three years. Broken resistance and the lower trendline combine to mark support in the 140 area. RSI became overbought the first week of April and GLD peaked three weeks later. A move back to the 50 area is possible during a correction. Chart 9 shows daily candlestick for a little more color. The January trendline and June low mark first support at 148 and the May lows mark key support at 142.
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Chart 8
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Chart 9
OIL DROPS ON TRIPLE WHAMMY... The triple whammy is not a new chart pattern. This refers to the three items weighing on oil prices today. Saudi Arabia announced that it would raise output, the Dollar surged and stocks were weak. Chart 10 shows the 12-Month US Oil Fund (USL) falling sharply to begin the month. After a bounce above 46 on Thursday, the ETF again fell sharply and is testing the flag trendline. With this weeks surge above 46, I elected to redraw the flag lines. The lower trendline has been touched three times, which increases its validity. The upper trendline cuts through the May 31st high, which may have been an overshoot. The June low now marks flag support. A move below this level would signal a continuation of the early May decline. Chart 11 shows the Energy SPDR (XLE) breaking flag support in early June.
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Chart 10
