FINANCE SECTOR LEADS THE MARKET LOWER -- MATERIALS SPDR FIRMS AT SUPPORT -- TECHNOLOGY SPDR TESTS DOUBLE TOP SUPPORT -- ENERGY SPDR FALLS WITHIN WEDGE -- MARKING KEY RESISTANCE FOR THE DOLLAR BULLISH ETF -- 13-WEEK TBILL YIELD FALLS TO 2008 LEVELS
FINANCE SECTOR LEADS THE MARKET LOWER... Link for todays video. With a little pop-and-drop action this week, three key sector ETFs established clear resistance levels chartists can watch to define a follow through. One day wonder-rallies and oversold bounces can happen with short covering and bottom picking. Follow through to these rallies would indicate new buying that is needed to sustain a bounce. The lowly finance sector remains at the top of the list as it leads the market lower again early Friday. Chart 1 shows the Finance SPDR (XLF) with two pop-and-drops establishing resistance just below 15.25. As noted before, there is potential support in the 14.75 area from broken resistance and the 62% retracement. XLF has certainly firmed in this area with a choppy trading range, but we have yet to see any kind of breakout that would suggest a reversal. So far this is just a rest within the downtrend. Look for a surge above 15.25 to forge a short-term breakout.
(click to view a live version of this chart)
Chart 1
MATERIALS SPDR FIRMS AT SUPPORT ... Chart 2 shows the Basic Materials SPDR (XLB) hitting support from the March low and doing the old pop-and-drop this week. Actually, there was not much of a drop because the ETF closed virtually unchanged on Thursday. Regardless, a clear short-term resistance level remains in play. XLB needs follow through above this level to trigger a short-term breakout. The indicator window shows the Commodity Channel Index (CCI) with a series of lower highs. A breakout here can be used to confirm a chart breakout.
(click to view a live version of this chart)
Chart 2
TECHNOLOGY SPDR TESTS DOUBLE TOP SUPPORT... Chart 3 shows the Technology ETF (XLK) with a potential Double Top working throughout the whole of 2011. Yep, this is one big consolidation. Keep in mind that a Double Top is not confirmed until there is a convincing break below support. So far, we have yet to see confirmation. This means the long-term uptrend has yet to be reversed. XLK consolidated the last two weeks and established short-term resistance with a couple of reaction highs. A move above 25.10 is needed to forge a short-term breakout. As far as the overall market is concerned, it is hard to envision at sustainable rally without breakouts in both XLK and XLF.
(click to view a live version of this chart)
Chart 3
The indicator window shows RSI hitting oversold for the third time in 12 months (blue arrows). Prior readings lead to a pretty good bounce. Also notice that RSI has a very small bullish divergence working over the last two weeks, RSI became oversold on July 10th and XLK forge a lower low on July 17th. The higher low in RSI makes for a small bullish divergence. Even so, we need a follow through breakout to solidify chart support.
ENERGY SPDR FALLS WITHIN WEDGE ... Last week I featured the Energy SPDR (XLE) as it broke neckline support of a large Head-and-Shoulders pattern. The support break remains valid, but it is not time to redraw and focus on what might prove this bearish pattern otherwise. Chart 5 shows XLE over the last 12 months. The advance from the August low to the April high was pretty much straight up. In fact, this advance looks so strong, it is probably a 3 of 3. This means it is Wave 3 of an even bigger Wave III. Chart 4 shows weekly candlesticks with a long-term wave count.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
Regardless of the wave count, the trend is down over the last two months and a fifth wave cannot materialize until there is a reversal breakout. Enter the falling wedge. Note that this wedge is the first decent correction since the August decline. XLE advanced from 50 to 80 (60%) without an extended correction. At this point, I would mark first resistance at 75. The downtrend is firmly in place as long as this level holds. The indicator window shows RSI breaking below 40 in early May and holding below 60 since. A break above 60 is needed to put momentum back on the bullish track.
MARKING KEY RESISTANCE FOR THE DOLLAR BULLISH ETF ... The troubles in Europe weighed on the Euro and pushed the Dollar higher over the last three weeks. Even so, the US Dollar Fund (UUP) remains below its May high and has yet to break resistance. Chart 6 shows UUP within a downtrend since June 2010, around 12 months. The ETF popped and dropped in May to establish resistance with the May high. There is also resistance near from the June 2010 trendline. A break above this May high is needed to trigger any kind of meaningful reversal. The indicator window shows RSI becoming oversold in late April and forming a higher low in May as it held above 30 (oversold). The ability to hold above this oversold level on the pullback shows less downside momentum. Now we need to see proof of some upside momentum. A move above 52 would clear the January high and shows the most upside momentum of 2011. Chart 7 shows the Euro Currency Trust (FXE) for reference.
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
13-WEEK TBILL YIELD FALLS TO 2008 LEVELS... The steep decline in Treasury yields reflects the current flight to safety. The 3-Month Treasury Bill is about the shortest debt instrument one can own. At the beginning of 2011, the yield was one tenth of one percent (.10). This is 1.0 on the chart. Believe it or not, that was a relatively high yield that reflected a little confidence in the global financial system. Chart 8 shows the 3-month T-Bill Yield ($IRX) falling below .01% this week as money sought safe haven. Yields were last below .01% in May 2011, November 2009 and December 2008. Yields remained above .125% the entire year in 2010. Current yield levels pose a problem for stocks. Such low yields indicate that investors prefer safety or the return OF their money over risk and the return ON their money.
