DIA FORMS ISLAND REVERSAL WITHIN BEAR WEDGE -- IWM RETRACES LESS THAN DIA ON OVERSOLD BOUNCE -- 2010 LOWS MARK NEXT BIG SUPPORT ZONE -- OIL HITS RESISTANCE WITHIN A DOWNTREND -- EURO TRUST FORGES OUTSIDE REVERSAL WEEK
DIA FORMS ISLAND REVERSAL WITHIN BEARISH WEDGE... Link for todays video. Chart 1 shows that classic technical analysis is alive and well for the Dow Industrials SPDR (DIA). First, the ETF formed a Double Top and confirmed this pattern with a break below the intermittent low. A major bearish reversal took place in early August. Second, this broken support level turned into resistance. This is a basic tenet of technical analysis. Third, there was a throwback rally to this newfound resistance level in August. A return to a broken support or resistance level is not uncommon. Fourth, this rally retraced 50-61.80% of the prior decline. A counter trend advance often retraces about half of the prior decline. First, a bearish wedge formed over the last four weeks. These are bearish patterns that form as counter trend rallies. All in all, the pieces are in place for a peak soon and continuation of the larger downtrend.
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Chart 1
Signs of a peak emerged this week as DIA formed two indecisive candlesticks on Tuesday and Wednesday. These were spinning tops in the 115-116 area. With a decline on Thursday, DIA showed its first sign of selling pressure since Mondays gap. Todays gap down created an island reversal over the last six trading days. A break below the wedge trendline would provide the second signal. Chartists can also turn to 14-period StochRSI for signs of a short-term trend change. This sensitive oscillator is the 14-period Stochastic Oscillator applied to 14-period RSI values. A move above .80 signals the start of an upswing, while a move below .20 signals the start of a downswing. The July 18th plunge below .20 signaled the last downswing and the August 15th surge above .80 signaled the most recent upswing.
IWM RETRACES LESS THAN DIA ON OVERSOLD BOUNCE... Chart 2 shows the Russell 2000 ETF (IWM) with a rising flag over the last four weeks. These are bearish continuation patterns. Even though the pattern looks rather large for a flag, it the sharp is correct. Bear flags rise after a sharp decline, bull flags fall after a sharp advance. This bear flag alleviated oversold conditions with a bounce that retraced 38-50% of the prior decline. Notice that this retracement was less than the DIA retracement, which indicates that the recovery in IWM was weaker. A move below the lower flag trendline would signal a continuation lower and target further weakness towards the 2010 lows. StochRSI is also shown for reference.
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Chart 2
2010 LOWS MARK NEXT BIG SUPPORT ZONE... If the second shoe is dropping here in September, the next target would be the 2010 lows for most of the major index ETFs (DIA, IWM, MDY, QQQ, SPY). Chart 3 shows the Dow Industrials SPDR with weekly bars extending back the last four years. A clear trendline break and support break are visible. As far as downside targets are concerned, we can use two tools: the prior lows and Fibonacci retracements. Several lows formed in the 95 area from February to August 2010. This marks a clear support area. Applying the Fibonacci Retracements Tool to the entire advance, we can see that a 50% retracement would extend to the 95 area as well. This confirms support from the 2010 lows.
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Chart 3
The indicator window shows RSI moving below 40 for the first time since June 2009. This move turned momentum long-term bearish. Notice how RSI moved below 40 in January 2008 and the 50-60 zone then turned into resistance for 18 months. Once RSI broke above 60, momentum moved in bull mode and the 40-50 zone turned into support. This level held for two years. Chart 4 shows the Russell 2000 ETF with next support in the 57-58 area.
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Chart 4
OIL HITS RESISTANCE WITHIN A DOWNTREND... Like the stock market, Spot Light Crude ($WTIC) is in a clear downtrend and shows signs that the current oversold bounce has ended. Chart 5 shows $WTIC within a falling channel since early May. Even when SPY was testing its May high in early July, $WTIC was already trading well below its early May high and showing relative weakness. Perhaps this was an early warning sign for the stock market. In the future, chartists might look for relative strength in oil to foreshadow a bottom in the stock market. So far, there are no signs of such relative strength or a bottom in crude. In fact, it looks like $WTIC has hit resistance and is ripe for a continuation lower. Notice that a rising wedge formed as crude returned to broken support, which turns resistance. Also notice that the wedge retraced 50-61.80% of the prior decline. A move below 84 would break wedge support and argue for yet another continuation lower. Chart 6 shows the US Oil Fund (USO) with similar characteristics.
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Chart 5
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Chart 6
EURO TRUST FORGES OUTSIDE REVERSAL WEEK... The Euro Currency Trust (FXE) opened strong on Monday, but moved lower throughout the week and will likely finish with a weekly outside reversal. An outside reversal occurs when the high is above the prior high and the low is below the prior low. I would also look for a close below the prior open to reinforce the reversal. While the overall trend remains up, chartists should watch support from the May-July lows for a potential trend reversal. Chart 7 shows FXE forming a big bearish engulfing in early May and the stalling the next 3-4 months. The May-July lows mark support at 139. A move below these levels would forge lower lows and break the June 2010 trendline. This would clearly reverse the uptrend.
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Chart 7
The indicator window shows StochRSI with horizontal lines set at .40 and .60. Instead of using .20 and .80 to generate signals, I am tightening the requirements because this is a weekly chart. A move above .60 is bullish until there is a counter move below .40. A move below .40 is bearish until there is a counter move above .60. Notice how StochRSI moved below .40 in early May and has yet to produce a counter signal. This indicator is in bear mode until a break above .60. Chart 8 shows the US Dollar Fund (UUP) trying to hold support around 21. The trend here is clearly down. A break above 21.75 on the price chart and 55 in RSI would reverse this downtrend.
