SMALL AND MID-CAPS LEAD STOCKS HIGHER -- REGIONAL BANK SPDR SURGES HIGHER -- RETAIL SPDR BREAKS MID AUGUST HIGH -- HOMEBUILDERS SPDR ADVANCES 5-DAYS STRAIGHT -- PERCENT OF SPX STOCKS ABOVE 50-DAY BREAKS 10%
SMALL AND MID-CAPS LEAD STOCKS HIGHER... Link for todays video. Stocks extended last weeks rally with strong gains on Monday. The appetite for risk reappeared as small-caps and mid-caps led the way higher. Chart 1 shows the Russell 2000 ETF (IWM) advancing over 4% with a surge above 72 today. The ETF successfully tested the early August low and is now challenging the mid August high. While a break above this level would be positive, I do not think it would be enough to reverse the technical damage from early August. Overall, I see a big resistance zone just ahead. The mid August high, broken support and the 38.2-50% retracement zone mark resistance in the 72-78 area. Specifically, there are two resistance clusters to watch. The 38.2% retracement and mid August high mark resistance around 72-73. The 50% retracement and broken support mark resistance around 76.
Chart 1
Chart 2 shows the S&P MidCap 400 SPDR (MDY) with similar characteristics. The ETF is currently challenging resistance from the mid August high and 38.2% retracement in the 157 area. Further up, broken support and the 61.80% retracement combine to mark resistance in the 167 area.
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Chart 2
LAGGING GROUPS LEAD MARKET REBOUND... The Homebuilders SPDR (XHB), Regional Bank SPDR (KRE) and Retail SPDR (XRT) are leading the market higher on the latest rebound. Before looking at these three ETFs, note that relative strength can be measured a number of ways. Chartists can compare relative gains or losses, plot a ratio chart or use a PerfChart. Chartists can also compare highs/lows and support/resistance for signs of relative strength or relative weakness. Chartists can use the S&P 500 ETF (SPY) has the chart benchmark. SPY tested its early August low in late August, but did not break it. Presently, the ETF is trading near its mid August high, but has yet to break it. The late August low and mid August high represent key points this month. Securities that moved below their early August lows in late August showed relative weakness. Securities that held above their early August lows showed relative strength. Securities that moved above their mid August highs show relative strength.
Chart 3 shows the Retail SPDR breaking to new lows for 2011, but finding support at 44 twice in August. The ETF surged above its mid August high today and shows relative strength the past week. While this move is positive, the ETF has resistance from broken support to contend with in the 49 area.
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Chart 3
Chart 4 shows the Homebuilders SPDR moving to a new 52-week low in early August and edging below this low in late August. Things have since turned around as the ETF moved higher the last five days and broke above its mid August high. Even though this breakout is positive, the current advance pales relative to the prior decline. In other words, it still looks like an oversold bounce within a bigger downtrend.
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Chart 4
Chart 5 shows the Regional Bank SPDR (KRE) also hitting a new 52-week low in late August and then surging above its mid August high today. The decline from 26 to 19.50 was incredibly sharp and the ETF became quite oversold. Also notice that a five wave sequence formed from early July to late August. This means we could be in the middle of a corrective advance, such as an ABC zigzag.
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Chart 5
PERCENT OF S&P 500 STOCKS ABOVE 50-DAY BREAKS 10%... The percentage of stocks above a specific moving average is a breadth indicator designed the measure the degree of participation within an index. The examples below show the percentage of stocks above the 50-day SMA ($SPXA50R) and 150-day SMA ($SPXA150R) in the S&P 500. These indicators can be used to identify overbought/oversold levels or strong moves that can signal the start of a new trend. Chart 6 shows the S&P 500 %Above 50-day SMA ($SPXA50R) over the last 10 years. I set horizontal lines at 10% and 90% to identify strong moves that could start new trends. A surge above 90% is considered bullish until there is a counter plunge below 10%. A plunge below 10% is bearish until there is a counter surge above 90%. A surge above 90% shows enough buying pressure to signal the start of an uptrend, while a plunge below 10% shows enough selling pressure to signal the start of a downtrend. The surge above 90% in October 2010 signaled the last uptrend and the plunge below 10% in August 2011 signaled the start of the current downtrend. This signal remains in force until it is proven otherwise with a counter surge above 90%. Because this system is based on a moving average cross, it will lag and not pick exact tops or bottoms.
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Chart 6
The S&P 500 %Above 50-day SMA ($SPXA50R) can also be used to identify overbought and oversold conditions. However, it is important to qualify these signals. In other words, oversold signals are preferred in an uptrend and overbought signals are preferred in a downtrend. An oversold condition within an uptrend represents a bullish opportunity after a pullback. An overbought condition within a downtrend represents a bearish opportunity after a bounce. Chart 7 shows the same chart with overbought (>70%) and oversold (<30%) levels. After a surge above 90% (green line), a move below 30% signals oversold conditions (blue arrows). After a plunge below 10%, a move above 70% signals overbought conditions (blue arrows). Overbought signals within an uptrend and oversold signals within a downtrend are ignored. The plunge below 10% was the most recent trend signal. A subsequent move above 70% would signal overbought conditions that could mark the peak for an oversold bounce.
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Chart 7
PERCENT OF S&P 500 STOCKS ABOVE 150-DAY SIGNALS BEAR MARKET... Chart 8 shows the S&P 500 %Above 150-day SMA ($SPXA150R) with horizontal lines at 15% and 85%. A 150-day SMA is longer and slower than a 50-day SMA. Therefore, I elected to tighten the emerging trend levels and overbought/oversold levels. This chart confirms the signals seen on the prior chart. The red dotted lines show the start of a new downtrend, while the green dotted lines show the start of a new uptrend. The last uptrend lasted from June 2009 until August 2011. The current downtrend started in early August 2011. Overbought is set at 60% and oversold is set at 40%. With the current trend down, oversold conditions will be ignored and overbought conditions will signal that a bounce could be ending.
