FINANCE SPDR BATTLES CENTERLINE OF BIG CONSOLIDATION -- BROKER-DEALER ISHARES FORMS WEEKLY BULLISH ENGULFING -- AD VOLUME LINES BOUNCE OFF 200-DAY SMAS -- NASDAQ 100 BREADTH IS LAGGING THE INDEX -- BOND ETF HITS KEY RETRACEMENT AS MOMENTUM WANES
FINANCE SPDR BATTLES CENTERLINE OF BIG CONSOLIDATION... Link for todays video. The finance sector has weighed on the broader market most of the year. While the ETF shows signs of firming this week, it remains short of the breakout needed to reverse the current downtrend. Chart 1 shows the Finance SPDR (XLF) in the center of a consolidation that extends back to August 2009, almost two years. The blue line marks the middle of this two year range. This level marked resistance from September 2009 to February 2010 and from June 2010 to October 2010 (red arrows). It is now marking support as XLF battles to stay above 15 the last six weeks. With a close above 15.25, a bullish engulfing would form this week. This may seem encouraging, but I would not be impressed unless there is follow through with a break above the June high. Notice that a long white candlestick and the February trendline mark resistance here. Barring a breakout, the trend is down and a move towards consolidation support is expected.
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Chart 1
BROKER-DEALER ISHARES FORMS WEEKLY BULLISH ENGULFING... The Broker-Dealer iShares (IAI) sprang to life with a weekly bullish engulfing to mark support. This pattern will remain valid as long as the ETF closes at 26.50 or higher. A bullish engulfing forms when the open is below the prior close and the close is above the prior open. This means the ETF started the week down, but recovered to finish the week on a strong note. Even though this is an encouraging sign for the group and the finance sector, we need to see a follow through breakout before taking it seriously. Notice that a bullish engulfing formed in August 2010 and the ETF broke out in late October. To confirm this bullish engulfing, I would like to see the ETF break above the June high and CCI move into positive territory.
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Chart 2
AD VOLUME LINES BOUNCE OFF 200-DAY SMAS... As noted on Wednesday, the major indices remain in uptrends as they trade close to their 2011 highs. Despite these uptrends, I am concerned with signs of less strength under the surface. The AD Volume Lines are breadth indicators based on Net Advancing Volume (volume of advancing stocks less volume of declining stocks). This is an indicator that represents large-cap stocks, which are typically the volume leaders. The AD Volume Lines rise when Net Advancing Volume is positive and fall when it is negative. Think of this indicator as an indication of money flowing into and out of stocks. The line rises when more money flows into stocks and falls when more money flows out of stocks.
Chart 3 shows the NYSE AD Volume Line along with the NY Composite ($NYA) in the indicator window. Both are shown with the 50-day SMA (blue) and 200-day SMA (red). The concern stems from the direction of the 50-day SMAs and proximity of support. Notice that both 50-day lines turned down in mid June and are currently moving lower. This tells me that the average price over the last 50-days is moving lower. The AD Volume Line recently bounced off support in June and July. The indicator is holding up so far, but a break below the March-June lows would be a bearish development.
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Chart 3
Chart 4 shows the Nasdaq AD Volume Line along with the Nasdaq and key moving averages. The 50-day SMAs turned down in mid June and are moving lower. The AD Volume Line established support with the March-June lows, but remains well below its February-May. The Nasdaq, in contrast, is trading above 2800 and near its prior highs. The AD Volume Line is not keeping pace with the Nasdaq and this is a concern. A break below the yellow support zone would be bearish for this indicator. Users can click these charts to see the settings and save them to their favorites list.
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Chart 4
NASDAQ 100 BREADTH IS LAGGING THE INDEX... The percentage of stocks trading above the 50-day SMA is a breadth indicator that measures the degree of participation within an index. With strong advances in Apple, Google and a few other big stocks, the Nasdaq 100 ($NDX) is challenging its 2011 highs this week. In addition, the index moved above its 50-day line at the end of June. Despite this strength, only 56% of Nasdaq 100 stocks are above their 50-day lines. Chart 5 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) over the last year. In the indicator window, we can see $NDX above 2400 and challenging its 2011 highs. There are no signs of weakness on the price chart. Looking under the hood, however, it is evident that 44% of the $NDX components are not following suit because they are not above their 50-day SMAs. With $NDX back near its 2011 highs, I would expect this indicator to be above 70%, as it was in February, April and May. The relatively low reading suggests that participation in the rally is waning and a little caution is advised. As far as signals are concerned, another move below 45% would be bearish. Chart 6 shows the S&P 500 %Above 50-day SMA ($SPXA50R) for reference.
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Chart 5
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Chart 6
BOND ETF HITS KEY RETRACEMENT AS MOMENTUM WANES... The 20+ year Bond ETF (TLT) remains in an uptrend since January, but the advance is loosing steam as prices stall near a key retracement. This jibes with sentiments echoed by John Murphy on Thursday. Namely, John noted that intermarket trends were positive for stocks and commodities, but negative for bonds and the Dollar. Chart 7 shows weekly bars for TLT over the last three years. Overall, a massive triangle is taking shape as prices narrow since the 1998 spike. Using StochRSI, I identified eight swings in the last three years. An upswing starts with a surge above .80 and a downswing starts with a decline below .20. StochRSI is like RSI on steroids. It is the Stochastic Oscillator applied to RSI, which makes it an indicator of an indicator. It is designed to increase sensitivity and signals in RSI. With a decline below .50, StochRSI is trading at its lowest level since February, which is when the current upswing started. This shows deteriorating momentum, but we have yet to see a downswing signal with a move below .20. Keep an eye out in the coming days and weeks.
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Chart 7
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Chart 8
Chart 8 shows daily bars with TLT hitting resistance in the 97-98 area. Resistance here stems from broken support and the 61.80% retracement. It looked like TLT was breaking down at the end of June, but a renewed Euro crisis triggered a surge back above 97 in early July. With yet another Greek bailout on the table, the Euro may get a respite and bonds could come under selling pressure as the need for a safe-haven diminishes. Dont take these fundamental pronouncements too seriously. The chart rules! The June 30th low marks key support at 93 and a close below this level would argue for a continuation of the August-February decline.
