NASDAQ UNDERPERFORMS NASDAQ 100 IN RISK-OFF ENVIRONMENT -- SEMICONDUCTOR HOLDRS FORMS DESCENDING TRIANGLE -- INTEL FAILS AT RESISTANCE AS NVDA FORMS FALLING FLAG -- SILVER ETF TESTS TRIANGLE SUPPORT
NASDAQ UNDERPERFORMS NASDAQ 100 IN RISK-OFF ENVIRONMENT... Link for todays video. There are a number of ways to measure the appetite for risk in the stock market. In particular, chartists can use ratio charts to compare the performance of two different indices or ETFs. Chartists first need to choose the index/ETF that represents risk-on and the one that represent risk-off. Chart 1 shows the Nasdaq with the Nasdaq/Nasdaq 100 ratio in the indicator window. The Nasdaq represents smaller techs stocks that are riskier than the larger tech stocks that dominate the Nasdaq 100. Theoretically, the Nasdaq should hold up well against the Nasdaq 100 in a risk-on environment and underperform in a risk-off environment. As the indicator window shows, the Nasdaq started seriously underperforming the Nasdaq 100 in mid July when the Price Relative ($COMPQ:$NDX ratio) broke support. By the time the Nasdaq broke support in early August, this Price Relative was already trading at a 52-week low. Relative weakness in the Nasdaq foreshadowed the August breakdown. Notice that the ratio moved to a new low this week. This affirms the current risk-off environment and there are no signs of a turnaround yet.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) with the IWM:OEF ratio. IWM represents small-caps and the risk-on trade. The S&P 100 ETF (OEF) represents large-caps and the risk-off trade. The IWM:OEF ratio broke support in early August, about the same time IWM broke support. This breakdown signaled risk-aversion in the stock market. The ratio has since consolidated the last few weeks, but overall trend here is clearly down and in favor of risk-off. Chartist can also try comparing the Consumer Discretionary SPDR (XLY) to the Consumer Staples SPDR (XLP) as well as the Rydex S&P Equal Weight Index (RSP) to the S&P 500 ETF (SPY).
Chart 2
SEMICONDUCTOR HOLDRS FORMS DESCENDING TRIANGLE ... The Semiconductor HOLDRS (SMH) was showing some strength earlier today, but gave up most of its gains to reinforce resistance. Chart 3 shows SMH in a clear downtrend after the early August support break. The ETF has been consolidating the last few weeks with a descending triangle taking shape. These patterns feature lower peaks and equal troughs. A break below trough support would signal a continuation lower. Before getting too bearish on SMH, also consider that a falling flag may be forming the last three days. Bullish flags fall as short-term correction. A move above the three-day high would break flag resistance and signal a continuation of last weeks surge. This would also break descending triangle resistance. The indicator window shows the Price Relative (SMH:SPY ratio) surging in September as SMH starts showing some relative strength. The Price Relative broke above the trendline extending down from May and semis are starting to show some early signs of relative strength. Lets see that flag breakout before taking it too seriously.
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Chart 3
INTEL FAILS AT RESISTANCE AS NVDA FORMS FALLING FLAG... Within the semiconductor group, chart 4 shows Intel (INTC) testing support from the April lows. The stock bounced off these lows in August and again in early September. Intel met resistance just below 20.50 twice in the last few weeks. The stock is getting a good bounce today and needs to clear this level to revive the uptrend. Chart 5 shows Nvidia (NVDA) breaking the June trendline with a gap-surge last week. This breakout is holding as the stock forms a falling flag the last four days. A break above 14.5 is needed to signal a continuation higher.
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Chart 4
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Chart 5
SILVER ETF TESTS TRIANGLE SUPPORT... Despite the troubles in Europe and weakness in the US stock market, gold and silver were under pressure on Monday. Chart 6 shows the Silver Trust (SLV) breaking triangle support with a decline below 39 on Monday. Taking a step back, notice that the ETF retraced 61.80% of its prior decline with a rising channel advance in July-August. The retracement and pattern are typical for counter-trend rallies. The ETF also broke this channel trendline today. The indicator window shows MACD moving sideways the since late July. This sideways movement reflects the loss of upside momentum the last several weeks. A move into negative territory would turn MACD (momentum) bearish.
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Chart 6
Even though gold remains in a long-term uptrend, signs of weakness are starting to appear and this could give way to a correction. Chart 7 shows the Gold SPDR (GLD) moving lower the last four days. The ETF met resistance at 185 last week, but remains above the early September low, which marks first support. A move below this level would also break the early July trendline. The indicator window shows CCI breaking into negative territory for the first time since early July.
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Chart 7
BANKS LEAD EUROPEAN STOCKS LOWER... The finance sector continues to be the weakest link in Europe. Big banks started showing relative weakness in early 2011 and this relative weakness simply accelerated in July. European banks are being affected by an array of stories today. French banks face the threat of a downgrade from the rating agencies because of their exposure to Greek debt. German banks were under pressure after an analyst downgrade. UK banks were under pressure after the government voiced its support for a plan to separate consumer banking from investment banking.
Regardless of the fundamental reasons, the following charts show big banks in clear downtrends. The only potentially positive takeaway is that these charts are looking quite oversold, which could give way to a bounce within the downtrend. At this point, we have yet to see any signs of support or a basing process that could give way to a bigger trend change. Chart 9 shows BNP Paribas (BNP.EU) gapping down and losing over 10%. The French bank is down over 50% from its 2011 high. Chart 9 shows Deutsche Bank (DBK.DE) plunging over 7%. This German bank is also down over 50% from its 2011 high and underperforming the German DAX Index. Chart 10 shows HSBC Holdings (HSBA.L) moving to a new 52-week low today. This UK bank is underperforming the FTSE. These are three of the top ten banks in the world. It is hard to have confidence in the financial systems with these charts.
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Chart 8
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Chart 9
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Chart 10
FRENCH AND GERMAN INDICES HIT TWO YEAR LOWS... Pervasive weakness in the finance sector pushed the German and French stock indices to new lows. Chart 11 shows the French CAC Index ($CAC) breaking two support levels with the August plunge. With a move below 3000, this index is well on its way to the March 2009 lows. Broken supports turn into the first resistance levels to watch on any bounce. Chart 12 shows the German DAX Index ($DAX) breaking supports with the August plunge. With the move below 5000 intraday, the index was down some 33% from its 2011 high.
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Chart 11
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Chart 12
RSI on both charts moved below 30 to become oversold in the second week of August. However, RSI remains oversold as selling pressure continues. An oversold bounce is likely at some point, but I would expect this to be just that: an oversold bounce within a bigger downtrend. RSI becomes oversold in downtrends, not uptrends. The August breakdown looks more like the breakdown in early 2008 (yellow area) than the bottoming process in late 2008. At worst, these indices could continue lower as they did in 2008. At best, it will likely take several months to form a bottom here and mount a sustainable advance.
