SPY STARTS WAVE 3 OF 5 DOWN -- GOLD HITS UPPER TRENDLINE OF RISING CHANNEL -- OIL AND STOCKS MAINTAIN POSITIVE CORRELATION -- XLE AND OIH CONSOLIDATE AFTER BREAKDOWNS -- DOLLAR CHALLENGES MAY HIGHS AS EURO CRUMBLES
SPY STARTS WAVE 3 OF 5 DOWN... Link for todays video. The zigzag higher since early August looks like an ABC correction that ended Wave-4 in the S&P 500 ETF (SPY). Chart 1 shows SPY with the 5% Zigzag indicator. This is not an indicator per se. It simply highlights moves that are 5% or greater. Smaller moves are ignored. SPY ended a 5-Wave advance with the early May high. A 5-Wave decline began with Wave-1 bottoming in mid June and Wave-2 peaking in early July. Wave-2 was extremely sharp and retraced almost all of Wave-1. Second Waves are often like this because a full trend reversal has yet to take shape. Wave-3 down broke below the lows of the prior Wave-4 and Wave-1 to forge a clear trend reversal. After becoming oversold in early August, SPY worked its way higher with an ABC zigzag. This pattern is clearly defined by the 5% Zigzag indicator. In fact, this count is almost too picture perfect. Should this count prove valid, the ABC corrective pattern marks Wave-4 up and Wave-5 down began with the early September decline. This Wave-5 may subdivide into five smaller waves (black numbers). As such, it looks like the early September decline marked Wave-1 and this weeks bounce marks Wave-2. This means Wave 3 of 5 is about to begin, which would target a move below the August lows.
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Chart 1
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Chart 2
At this point, SPY remains in an uptrend since the early August low. As noted earlier this week, chart 2 shows SPY with a series of rising peaks and rising troughs that form a rising flag. Tuesdays opening low marks the last trough or key support. A move below this level would forge a lower trough to signal the start of a downtrend. It would also confirm the flag and signal a continuation of the prior decline (135 to 112).
GOLD HITS UPPER TRENDLINE OF RISING CHANNEL... Chart 3 shows the Gold SPDR (GLD) in a clear uptrend, but the ETF continues to hit resistance from the upper trendline of a rising channel. This is more an overbought condition than a hard resistance level. Notice that the upper trendline has been touched three times now. The lower trendline has also been touched at least three times, which makes these valid trendlines. GLD has been knocking against the upper trendline for four weeks now. The lower trendline and broken resistance combine to mark the next support zone in the low 150s (yellow area). A move above 190 could signal the start a seriously parabolic surge. It would also likely coincide with some sort of crisis, here or in Europe.
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Chart 3
The indicator window shows the TRIX Oscillator. This is the 1-period Rate-of-Change of a triple smoothed exponential moving average. In this example, I am using a 5-period TRIX, which measures the 1-period Rate-of-Change of the 5-period triple smoothed EMA. A 3-day EMA was applied as the signal line (red). TRIX(5,3) is one third of the default setting (15,9). Because the indicator is already smoothed, I lower the settings to increase sensitivity. TRIX remains above its signal line (3-day EMA) to define the current advance. A move below would signal a pullback and possible support test in GLD. You can read more on the TRIX in ChartSchool.
Chart 4 shows daily candlesticks for the Gold SPDR. The trendline extending up from early July and this weeks low mark first support at 174.40. CCI held the zero line twice in the last few weeks and this level marks momentum support.
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Chart 4
OIL AND STOCKS MAINTAIN POSITIVE CORRELATION ... As with stocks, the US Oil Fund (USO) remains in a downtrend overall and hit resistance from broken support this week. Chart 5 shows USO with the Correlation Coefficient in the indicator window. This indicator dipped into negative territory from mid January to mid March, but has been largely positive the other ten months. In fact, the Correlation Coefficient has been above .75 since early August, which indicates a strong positive correlation with the stock market. On the price chart, USO ran into resistance in the 35 area. Resistance here stems from broken support and the 50% retracement zone. Also notice that the early May trendline marks resistance in the 35.50 area. As with SPY, USO has been edging higher since the early August low. A rising wedge is taking shape and a break below the lower trendline would provide the first sign of a downside continuation.
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Chart 5
XLE AND OIH CONSOLIDATE AFTER BREAKDOWNS... Like many ETFs, the Energy SPDR (XLE) and the Oil Service HOLDRS (OIH) consolidated after their August breakdowns. Chart 6 shows XLE breaking support with a plunge below 70 in early August. This is clearly a long-term bearish development until there is evidence to the contrary. Broken support turns into the first resistance test (70). A surge back above 70 would call for a reassessment. Overall, it looks like a triangle is forming and a break below triangle support would signal a continuation lower. Chart 7 shows OIH with similar characteristics.
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Chart 6
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Chart 7
DOLLAR CHALLENGES MAY HIGHS AS EURO CRUMBLES... Chart 8 shows the US Dollar Fund (UUP) surging over the last two weeks and challenging its May high. This chart has all the hallmarks of a trend reversal. The ETF formed a 4 to 5 month base with a trading range and is in the process of breaking range resistance with a strong surge. Should this mornings gains hold, the two week surge would be the strongest since May 2010, scene of the last bull-run. RSI confirms the trend reversal with a break to its highest level since June 2010. RSI met resistance just above 50 over the last 12 months. This weeks breakout turns RSI (momentum) bullish.
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Chart 8
Chart 9 shows the Euro Currency Trust (FXE) starting the week sharply lower and continuing down to break support from the May lows. The Euro accounts for some 57% of the US Dollar Index and Euro weakness is the main driver behind Dollar strength. This weeks decline broke the trendline extending up from June 2010 and the May-July lows (key support). The big trend is now down with the next support in the low 130s. The Fibonacci Retracements Tool marks the 50-61.80% retracement zone here.
