SPY FORMS TRIANGLE WITHIN DOWNTREND -- AUGUST 2010 LOWS MARK NEXT SUPPORT -- LARGE TECHS SPRING TO LIFE WITH QQQ LEADING -- NETWORKING AND SEMIS LEAD TECHS HIGHER -- PROVING A BEARISH REVERSAL OTHERWISE
SPY FORMS TRIANGLE WITHIN DOWNTREND... Link for todays video. After sharp declines in late July and early August, stocks have been moving sideways the last 3-4 weeks. This is pretty normal because stocks were quite oversold on August 8th, which is when the S&P 500 ETF (SPY) first hit 112. Triangles have taken shape in many ETFs as the bulls and bears slug is out for immediate supremacy. Chart 1 shows SPY with a triangle extending back to the August 9th low. This pattern is usually a continuation pattern. It represents a rest designed to alleviate oversold conditions. A move below the lower trendline would signal a continuation lower. Chartists must also remain vigilant for a possible upside breakout. A move above the upper trendline would argue for further strength towards broken support in the 124-126 area.
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Chart 1
The indicator window shows the Commodity Channel Index (CCI) with trendline signals over the last six months. A bullish signal occurs with a break above the falling (red) trendline, while a bearish signal occurs with a break below the rising (green) trendline. This CCI system is currently on a bullish signal. Notice that the indicator is hovering above the -100 level. A break above the zero line would reinforce the momentum upturn. However, a break back below -100 would be bearish for momentum. Such an occurrence happened in early June (red arrow).
AUGUST 2010 LOWS MARK NEXT SUPPORT... Should SPY break triangle support and continue lower, the August 2010 lows mark next support in 102.50 area. Ouch! That is another 11% lower. Chart 2 shows SPY with Aroon (25), which works well when the trend is strong. Notice how Aroon Up (green) surged above Aroon Down (red) and to 100 in mid September 2010. Aroon Up remained above Aroon Down until mid March 2011. Signals occur when one crosses the other and then hits 100. The cross is the first sign. The push is 100 is the confirmation. Most recently, Aroon Down surged above Aroon up and hit 100 on August 2nd. This signal remains valid until there is another cross. A new uptrend would be signaled if Aroon Up surges to 100. You can read more on Aroon in our ChartSchool article.
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Chart 2
LARGE TECHS SPRING TO LIFE WITH QQQ LEADING... The Bernanke speech came and went without much fanfare. Even though the Fed Chairman did not unveil a new stimulus plan, stocks bounced after the speech with the Nasdaq 100 ETF (QQQ) leading the way. Chart 3 shows QQQ gaining over 2% in early trading on Friday. The ETF remains below its support break and in bear mode overall, but a short-term bounce is not out of the question here. The most obvious resistance zone is in the 53.5-54.5 area, which is marked by broken support and the mid August high. The indicator window shows CCI below the red trendline and in a downswing. This trendline marks momentum resistance at the zero line. A break above this level would show an improvement in momentum that would give way to a bigger counter-trend bounce.
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Chart 3
NETWORKING AND SEMIS LEAD TECHS HIGHER... Within the technology sector, the Networking iShares (IGN) and the Semiconductor HOLDRS (SMH) were leading the market higher early Friday. Chart 4 shows SMH breaking a major support level in early August and plunging below 28 last week. The big trend is clearly down on this chart, but SMH became oversold and ripe for a bounce. The ETF formed a long white candlestick last week, held last weeks lows this week and is getting another bounce today. There are, however, a number of potential resistance hurdles in the way. First, the mid August gap marks resistance around 29. Second, the mid August high marks resistance at 30. Third, broken support marks resistance around 32. This area also marks a 50% retracement of the May-August decline. Forced to choose, I would select 30 as base-case resistance. In addition to these resistance hurdles, continued relative weakness is another reason to have doubts on this bounce. The indicator window shows SMH relative to SPY. Semis are still showing relative weakness as the Price Relative remains in a downtrend.
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Chart 4
Chart 5 shows the Networking iShares (IGN) falling off a cliff from late July to early August. The ETF was already in a downtrend and this downtrend just accelerated. Sometimes a downside acceleration signals a selling climax that can lead to an important low. However, there is clearly no evidence of an uptrend on this chart. Most likely, some sort of basing process is needed first. As with SMH, the most expected here is an oversold bounce and there are three resistance hurdles. The mid August gap and high mark the first two. Broken support turns into resistance for the third. Forced to choose, I would mark resistance in the 30 area. Relative weakness is another reason not to get too excited here. The Price Relative remains in a downtrend and has yet to break above its mid August high.
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Chart 5
PROVING A BEARISH REVERSAL OTHERWISE... With the S&P 500 breaking a major support level and hitting a new low for 2011 this month, the bears are no doubt feeling pretty comfortable with their positions. The technical damage certainly justifies this stance. Moreover, I have yet to see bullish evidence that would overrule this stance. Bearish analysts reinforce this thinking and bullish analysts seem a bit out of sync. This does not mean, however, that we should dismiss the bullish arguments. In fact, I try to focus on these arguments to find holes in the bearish case. This goes right to the heart of Dow Theory. The bears are in charge until proven otherwise. What would it take to reverse this bullish stance?
With this question in mind, I went back through to charts to find prior trend changing declines that did not result in major trend changes. Huh? August 1998 was the first one to pop up. Chart 6 shows the S&P 500 from August 1997 to July 1998. There is nothing but uptrend on this chart. There was a sharp rise from April to July 1997. A five month inverse Head-and-Shoulders pattern formed after this advance. This amounted to a bullish continuation pattern. SPX broke resistance, continued higher and then formed a channel. The channel breakout in June signaled a continuation of the uptrend. All signs were bullish in mid July with the index trading near 1175.
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Chart 6
Chart 7 shows the S&P 500 from March 1997 to December 1998. We can study this chart for clues on how a bearish signal is reversed. First, there was a clear bearish break down. The channel breakout failed to hold and the index broke support at 1075 with a decline in August. Sounds eerily familiar. Notice that a consolidation formed around the support break. A clear trend reversal was in force by late August as the index plunged below 1000. The first bounce off 950 was rather strong, but failed near broken resistance and there was another retest of the lows. Notice how the index dipped below 950 twice and recovered. This was the first positive sign. There was a surge around 1000 and then a stall for 1-2 days. A second follow through surge pushed the index above 1050. This was the first signal that a trend change may be afoot. After a small consolidation near the resistance break, the index pushed higher to confirm a bullish reversal.
