RUSSELL 2000 ETF HEADS TOWARDS KEY SUPPORT TESTS -- 7-10 YEAR BOND ETF SURGES TO NEW 52-WEEK HIGH -- AD VOLUME LINES FORM LOWER HIGHS WITH JULY PLUNGE -- PERCENTAGE OF SPX STOCKS ABOVE 150-DAY SMA BREAKS 50%
RUSSELL 2000 ETF HEADS TOWARDS KEY SUPPORT TESTS... Link for todays video. When it rains it pours. While most of this weeks media focus has been on the debt-ceiling debacle, Wall Street appears more focused on recent economic reports that show slowing growth. On Wednesday, it was reported that Durable Goods Orders unexpectedly fell in June. Also, the Feds Beige book showed slowing growth in 8 of 12 regions. Today, second quarter GDP growth was reported at 1.3%, which was worse-than-expected. Already smarting from Wednesdays losses, stocks took another big hit early Friday. Once again, small and mid-caps led the way down. Chart 1 shows the Russell 2000 ETF (IWM) moving towards support from the 2011 lows. This support level held in January, March and June. A break would trigger a trend reversal similar to that seen in September 2010, which is when the ETF broke a major resistance level marked by two highs. The indicator window shows the Price Relative forming a lower high in July and testing its June low. Small-caps (IWM) are underperforming large-caps (SPY).
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Chart 1
Chart 2 shows the S&P MidCap 400 SPDR (MDY) opening below 170 today and testing support from the March-June lows. Notice that the Price Relative (MDY:SPY ratio) broke below its June low as mid-caps lead lower. As noted on Wednesday, small and mid-caps are more sensitive (than large-caps) to the domestic economy and changes in the economic outlook. These stocks are like the canaries in the coal mine. They will be the first to suffer if economic growth stalls.
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Chart 2
7-10 YEAR BOND ETF SURGES TO NEW 52-WEEK HIGH ... Despite the debt-ceiling overhang, the bond market moved sharply higher early Friday. Strength in bonds stems from worse-than-expected economic numbers and weakness in stocks. Chart 3 shows the 7-10 year Bond ETF (IEF) hitting a 52-week high with a surge above 98 today. The move in bonds since February is truly remarkable. IEF is up almost 9% in six months and 4% since early July. Such strength in bonds jibes with the weak economic numbers seen over the last few weeks. Moreover, it is clear that bonds are not very concerned with the debt-ceiling or the prospects of a credit downgrade. As James Carville might say, its the economy, stupid. On the price chart, the steep April trendline and mid July low mark first supports.
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Chart 3
TLT TRACES OUT INVERSE HEAD AND SHOULDERS PATTERN... Chart 4 shows the 20+ year Bond ETF (TLT) challenging resistance in the 97-98 area. While I remain wary of this resistance level, the trend since February is clearly up. An inverse Head-and-Shoulders has taken shape the last two months with neckline resistance in the 97-98 area. A break above this level would further the bullish cause for bonds and bearish argument for stocks. The mid July lows mark the first support level to watch.
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Chart 4
AD VOLUME LINES FORM LOWER HIGHS WITH JULY PLUNGE... The AD Volume Lines are showing weakness with lower highs and sharp downturns in July. The lower highs indicate weak buying pressure during the June surge, while the sharp declines this month show an increase in selling pressure. It looks like downtrends are taking shape. Chart 5 shows the Nasdaq AD Volume Line peaking in early May, dipping below its May low and then forming a lower high in early July. The combination looks like the start of downtrends for these key breadth indicators. The indicator window shows the 100-day SMA of the Net Advancing Volume Ratio ($NAUD:$NATV). In general, the bulls have a medium-term edge when this indicator is positive and the bears when negative. The indicator has been fluctuating around the zero line the last five weeks. Hows that for indecisive? With a range forming, we can look for a range break to trigger the next signal.
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Chart 5
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Chart 6
Chart 6 shows the NYSE AD Volume Line with the same indicator. The AD Volume Line peaked in late April, edged below its March low and formed a lower high in early July. Again, it looks like a downtrend is emerging here. The 100-day SMA of the Net Advancing Volume Ratio ($NYUD:$NYTV) edged below zero the last two weeks. There is a clear resistance level at .025 and a break above the July high is needed to revive this key breadth indicator.
On Wednesday, I mentioned that I was not a big fan of exchange volume, which was dominated by a few big banks and did not reflect the so-called dark pools. That does not mean I ignore total volume levels or that they are bad indicators. Instead of total volume, I prefer to look at Net Advancing Volume, which is the volume of advancing issues less the volume of declining issues. This is still based on the same exchange volume, but I think Net Advancing Volume better reflects the balance between buying and selling pressure. Keep in mind that it is just an indicator. Like all indicators, it should be used in conjunction with other aspects of technical analysis.
PERCENTAGE OF SPX STOCKS ABOVE 150-DAY SMA BREAKS 50%... While the 50-day SMA and 200-day SMA are the most popular moving averages, some chartists advocate using the 150-day SMA, which occupies a sweet spot between these two. In particular, Carter Worth, Chief Market Technician for Oppenheimer, advocates using the 150-day SMA for stocks and indices. In an interview last year, Worth also notes that Joe Granville, creator of On Balance Volume, was one of the first technicians to work with 150-day SMA. Chartists can also use this moving average as a breadth indicator for the Nasdaq 100 and S&P 500. Chart 7 shows the S&P 500 %Above 150-day SMA ($SPXA150R) with a 20-day SMA for smoothing (red). Notice that less than 50% of S&P 500 components are currently above their 150-day SMA. Why is this important? Many Buyers over the last 150 days are under water when a stock is trading below its 150-day average. This means a fair number of shareholders are unhappy with price direction. The current dip below 50% is the second in two months. Also notice that the deterioration that occurred from April to July. While the S&P 500 came close to its April-May highs this month, the indicator did not make it above 75%. This weeks break back below 50% indicates that selling pressure within the index is broadening.
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Chart 7
Chart 8 shows the Nasdaq 100 %Above 150-day SMA ($NDXA150R) with the 20-day SMA for smoothing. This chart shows the same characteristics. This weeks dip below 45% was the second in two months. The indicator failed to exceed 75% during the June-July rally as participation narrowed. There is clearly a divergence between the index and the indicator. $NDX is trading near its 2011 high, but the majority of stocks are below their 150-day SMA.
