IWM AND SPY FORM RISING FLAG PATTERNS -- FINANCE SECTOR AND REGIONAL BANKS LEAD MARKET REBOUND -- UTILITIES SECTOR REMAINS THE STRONGEST SECTOR OVERALL -- PERCENT OF STOCKS ABOVE 200-DAY HITS BEAR MARKET TERRITORY
IWM AND SPY FORM RISING FLAG PATTERNS ... Link for todays video. Price action remains quite choppy for stocks over the last five weeks. In particular, the Russell 2000 ETF (IWM) has had five swings of at least 5% in the last five weeks. These swings, which were based on closing prices, would be even greater if based on the swing highs and swing lows. Trading has been one choppy affair since the August breakdown. As far as I am concerned, Tuesdays rebound after a weak open and Wednesdays surge are not enough to reverse the August breakdown. In other words, the current bounce still looks like a corrective advance within a bigger downtrend. This bigger downtrend will likely pull trump at some point. Chart 1 shows IWM breaking a clear support zone with a decisive move. The zigzag advance over the last five weeks looks like a rising flag. It is a rather large (tall) rising flag, but the shape of the pattern is clear. IWM opened near the lower trendline on Tuesday and bounced back towards 70 on Wednesday. This reinforces support at 66. A move below Tuesdays open would break the flag trendline and signal a continuation of the prior decline (ouch). Short-term, the bulls have a slight edge because the rising flag marks a short-term uptrend (higher peaks and higher troughs). A move below the last trough (Tuesday AM) would end this series.
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Chart 1
Chart 2 shows the S&P 500 ETF (SPY) with a rising flag similar to IWM. The ETF met resistance just before broken support and bounced off the lower trendline the last two days. This move reinforces flag support and a break below Tuesdays low would signal a continuation of the prior decline. The Commodity Channel Index (CCI) is shown in the indicator window. Notice how it is rising along with the flag. A break below the green trendline or a move into negative territory would turn momentum bearish.
Chart 2
FINANCE SECTOR AND REGIONAL BANKS LEAD MARKET REBOUND... The Finance SPDR (XLF) led the sector SPDRs higher with a 4+ percent surge on Tuesday. While this one-day gain is certainly impressive, chart 3 shows the ETF within a trading range since early August. Range support is at 11.75 and range resistance resides at 13.50. A break above range resistance would argue for further strength towards the next resistance zone. Broken support marks resistance at 14.50. While a range breakout would be positive, it would still be within the confines of a bigger downtrend. Also note that XLF continues to show relative weakness as the Price Relative (XLF:SPY ratio) hit a new low on this month.
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Chart 3
Chart 4 shows the Regional Bank SPDR (KRE) surging off support from the August low. While todays 5+ percent surge is certainly impressive for one day, the ETF remains in a downtrend over the last six months and a trading range over the last five weeks. Support at 19.50 has been reinforced with todays surge, but the ETF remains well short of an upside breakout. A break above resistance would argue for further strength towards broken support in the 23.70 area.
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Chart 4
UTILITIES SECTOR REMAINS THE STRONGEST SECTOR OVERALL... The Utilities SPDR (XLU) is still the strongest of the nine sector SPDRs by far. All sectors were hit hard in early August, but XLU is the only one to make it back to its May-July highs. The remaining eight sectors fell well short. Chart 5 shows XLU plunging below 30 in early August and surging right back to resistance at the end of the month. After a pullback Friday-Monday, the ETF is back at it again with another move towards resistance. The indicator window shows XLU relative to the S&P 500 ETF with the XLU:SPY ratio. This ratio rises when XLU leads and falls when XLU lags. The indicator turned up in mid April and remains in an uptrend as XLU continues to outperform the market.
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Chart 5
Relative strength in the utilities sector stands out on the Sector SPDR PerfChart going back to early August. Note that all sectors are up since August 8th. However, relative to the S&P 500, only six of the nine are outperforming. The Technology ETF (XLK), Industrials SPDR (XLI) and Finance SPDR (XLF) are underperforming. This means they are up LESS than the S&P 500. The Utilities SPDR is outperforming the most. Also note that the Healthcare SPDR (XLV) is in second place for relative performance. Strength in these sectors reflects a market in defensive mode.
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Chart 6
PERCENT OF STOCKS ABOVE 200-DAY HITS BEAR MARKET TERRITORY... The percentage of stocks trading above the 200-day moving average is a breadth indicator designed to measure underlying strength or weakness within an index. Chart 7 shows the 23-day SMA of the S&P 500 %Above 200-day SMA ($SPXA200R). I applied a 23-day moving average (one month) to smooth the data series and reduce whipsaws (and signals). Basically, a bull signal is in force when this indicator moves above 55% and a bear signal prevails with a move below 45%. Instead of using crosses above/below the 50% line, I added 5% thresholds to reduce whipsaws. There have been five signals in the last seven years. Except for the whipsaw in September-October 2007, the signals have been pretty good at calling the big trend. Most recently, the indicator moved below 45% for the first time since May 2009.
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Chart 7
Chart 8 shows the 23-day SMA of the Nasdaq 100 %Above 200-day SMA ($NDXA200R). Because the Nasdaq 100 is less diversified and its components are more volatile, I expanded the bullish threshold to 60% and the bearish threshold to 40%. This did not eliminate whipsaws, but it reduced signals enough to capture the overall trend. This indicator was in bull mode from June 2009 until August 2011, over two years. With a move below 40% in mid August, the indicator is now in bear mode. While nobody knows how long this signal will last, the bears are clearly in control when less than 50% of the stocks are above their 200-day moving averages. Click here for other breadth indicators based on the percentage of stocks above a specific moving average.
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Chart 8
