DOW INDUSTRIALS SPDR TESTS TWO MAJOR TRENDLINES -- HEALTHCARE SECTOR HAMMERED AFTER DEBT DEAL -- AETNA, CIGNA AND UNITEDHEALTH LEAD LOWER -- RETAIL ETF EDGES LOWER WITH FALLING WEDGE
DOW INDUSTRIALS SPDR TESTS TWO MAJOR TRENDLINES... Link for todays video. The debt-ceiling debacle turned into a deal over the weekend, but stocks continued to focus on the economy Monday as did bonds. In keeping with last weeks wave of bad economic news, the ISM Manufacturing Index dropped to its lowest level since July 2009. The June reading of 50.9, was well below consensus (54.3), but above the critical 50 level. Anything above 50 suggests economic expansion. Anything below 50 indicates economic contraction. While we have yet to see a contraction, recent evidence suggests that economy is not growing as fast as the stock market thought it was growing. The major index ETFs were trading near their March lows in mid June, but the ensuing rally pushed many back toward their 2011 highs by early July. Stocks were priced for strong growth in early July. With recent economic numbers suggesting otherwise, stocks are making an adjustment to price in this news.
Chart 1 shows the Dow Industrials SPDR (DIA) moving back above 125 at the end of June and holding above this level into mid July. DIA was priced to perfection above 125. With the economic numbers coming up short, DIA corrected sharply over the last six trading days. The ETF is now poised to test support from the July 2009 trendline and the May 2011 low in the 118 area. A break below this support level would argue for a bigger trend reversal and an extended correction of the prior advance (June 2010 to April 2011). The indicator window shows RSI testing its support zone (40-50). Notice that this zone held during the entire advance. A break below 40 would be bearish for long-term momentum.
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Chart 1
Chart 2 shows DIA with daily bars over the last 14 months and the second major trendline. The July 2010 trendline has been touched three times and DIA is testing this trendline right now. Overall, a Double Top is taking shape with the reaction highs in the 127.50 area. These are bearish reversal patterns that require confirmation with a support break. A move below the June low would do the trick. RSI is shown in the indicator window. Notice that RSI became overbought (>70) several times during the uptrend and never became oversold. Selling pressure strong enough to push RSI below 30 would indicate that bigger downtrend is taking shape. Why? Because oversold conditions are more indicative of a downtrend than an uptrend.
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Chart 2
HEALTHCARE SECTOR HAMMERED AFTER DEBT DEAL... The Healthcare SPDR (XLV) led the market lower because the debt plan will cut Medicare payments to skilled nursing facilities. Chart 3 shows XLV breaking below the August trendline and nearing its next support level around 33. Support in this area stems from the 38.2% retracement and broken resistance. Also note that the ETF is short-term oversold after a 6+ percent plunge the last seven trading days. XLV was leading the market in June as the Price Relative hit a new high. Relative weakness since mid June pushed the Price Relative lower and healthcare has become a lagging sector.
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Chart 3
Chart 4 shows the Healthcare Providers ETF (IHF) plunging over 4% today. This group was hit especially hard. Even so, potential support is at hand from the 38.2% retracement and March lows around 58.
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Chart 4
AETNA, CIGNA AND UNITEDHEALTH LEAD LOWER... Within the healthcare providers group, Aetna (AET), Cigna (CI) and UnitedHeath (UNH) are experiencing strong selling pressure. All three experienced massive gains from July 2010 to July 2011. At the very least, a correction or some sort of pullback was in order. Chartists can estimate support levels using the Fibonacci Retracements Tool and analyzing price action. Each chart shows the Fibonacci Retracements Tool extending from the July 2010 low to the 2011 high. The 38.2% retracement is the first area to consider for potential support. Chartists can then look for price support levels that confirm this retracement level. Broken resistance, prior lows and trendlines can be use to estimate support. The green dotted line marks a broken resistance level that turns into potential support. These levels are confirmed by the 38.2% retracement. All three stocks are currently above these levels.
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Chart 5
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Chart 6
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Chart 7
RETAIL ETF EDGES LOWER WITH FALLING WEDGE... The retail group declined along with the rest of the market the last several weeks, but has been holding up better than the market this year. Chart 8 shows the Retail SPDR (XRT) with a falling flag taking shape since early July. The ETF surged above 56 with a gap and long white candlestick, but failed to hold this gap and declined back below 54 last week. This makes it an exhaustion gap, which is bearish. The four week trend is clearly down as long as the flag falls. There is potential support at hand from the 50-62% retracement zone. Even so, we have yet to see any evidence of strength since early July. A move above the upper trendline would reverse this short-term downtrend and argue for a resumption of the bigger uptrend.
