CONSUMER DISCRETIONARY SPDR RUNS INTO RESISTANCE -- NASDAQ AD LINE HITS NEW LOW AS NYSE AD LINE BOUNCES -- BIG TECHS LIFT NASDAQ AD VOLUME LINE -- BANKS WEIGH ON NYSE AD VOLUME LINE -- CUMULATIVE NET NEW HIGHS LINES REMAIN WEAK
CONSUMER DISCRETIONARY SPDR RUNS INTO RESISTANCE... The Consumer Discretionary SPDR (XLY) is a bit of a conundrum right now. Chart 1 shows the ETF moving into bear mode with a break below the June lows in August. After this decline, the ETF formed a rising flag over the last 5-6 weeks. Rising flags are corrective patterns that form after a sharp decline. They represent a bear market rally. This is opposed to falling flags, which represent pullbacks in bull markets. While the August breakdown and the current rising flag are bearish, the ETF surged over 6% this week and the Price Relative hit a new high. That is one strong surge. Moreover, it is positive to see the Price Relative hitting a new high and this key sector showing relative strength.
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Chart 1
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Chart 2
Chart 2 shows daily candlesticks for more granularity on the patterns. Even though a new high in the Price Relative is quite positive, the ETF is running into resistance now. Broken support and the 50-61.80% retracements combine for a resistance zone in the 37.5-38.5 area. In addition, the ETF is short-term overbought after a 6+ percent advance this week. A bearish candlestick reversal in this resistance zone would be most ominous. As far as the bigger picture is concerned, a move below the flag trendline would signal a continuation of the August decline and target a move towards next support in the 28.30 area. Note that there are similar patterns on for DIA, IWM, MDY, SPY and ISI. The September lows hold the key to the next leg down.
NASDAQ AD LINE HITS NEW LOW AS NYSE AD LINE BOUNCES... The next chart group covers market breadth. This is like looking under the hood of the auto (market) to see how the individual parts are running. These indicators are also known as the market internals. I like to use these indicators as one group to get a consensus reading for internal strength or weakness. Right now the consensus still shows more weakness than strength and this favors the bears. Keep in mind that users can click on any of these charts to see the settings and save them to their favorites list. There are no signs of strength in the Nasdaq AD Line, but the NYSE AD Line has been working its way higher since early August. Chart 3 shows the Nasdaq AD Line ($NAAD) hitting a new low in early September and in a clear downtrend. The indicator broke major support in June and pushed to new lows in August and September. There are simply no signs of strength here.
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Chart 3
Chart 4 shows the NYSE AD Line ($NYAD) with a big support break in early August and zigzag advance the last six weeks. Even though the AD Line has rising peaks and troughs since early August, I view this as a rising flag type advance. Rising flags are bearish patterns that form as corrective advances after a sharp decline. A move below the early September low would end this rise and call for a continuation of the bigger downtrend.
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Chart 4
BIG TECHS LIFT NASDAQ AD VOLUME LINE... Large-cap tech stocks are lifting the Nasdaq AD Line, while banking stocks are weighing on the NYSE AD Volume Line. Chart 5 shows the Nasdaq AD Volume Line ($NAUD) breaking down in early August with a sharp move below support. The long-term trend is down (bearish) for this key indicator. Even though the Nasdaq AD Line moved to new lows this month, the AD Volume Line formed a higher low and broke above its mid August high. This can be attributed to the recent strength in some of the tech titans, such as Apple, Intel, Cisco, Microsoft and Oracle. This little breakout is positive, but I do not think it is enough to undo the bigger support break from early August.
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Chart 5
BANKS WEIGH ON NYSE AD VOLUME LINE... Chart 6 shows the NYSE AD Volume Line ($NYUD) below its mid-late August highs. Relative weakness in this indicator can be attributed to some big bank volume leaders, such as Bank of America, Citigroup, Wells Fargo and JP Morgan. These four are regularly on the most active list for the NYSE. As with the Nasdaq AD Volume Line, I view the big support break in early August as the defining feature here. While a break above the August 31st high would be positive, it would still not be enough to undo the August support break.
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Chart 6
CUMULATIVE NET NEW HIGHS LINES REMAIN IN DOWNTRENDS... Net New Highs form the final piece of the breadth puzzle. This indicator is formed by first subtracting new 52-week lows from 52-week highs. The base indicator is positive when there are more new highs than new lows and negative otherwise. Chartists can also form a cumulative line to track the progress of Net New Highs over time. A rising Cumulative Net New Highs Line shows that new highs are consistently outpacing new lows, which is bullish. A falling line indicates that new lows are outpacing new highs and this is bearish. The Cumulative Net New Highs Line is relatively smooth already. Therefore, chartists can apply a short moving average to determine direction. Chart 7 shows the NYSE Cumulative Net New Highs Line ($NYHL) with a 10-day EMA. This line is rising (bullish) when above and falling (bearish) when below. This line rose from mid July 2010 to early August 2011, just over one year. Yes, it was above the 10-day EMA this entire time and caught a monster rally in the NY Composite. All signals are not going to be this good and there will be times when the line is flat, such as May-July 2010. The line turned down in early August and broke below its 10-day EMA. This bearish signal coincided with the big support break in the NY Composite. The Cumulative Net New Highs Line remains below its 10-day EMA because we have yet to see an expansion of new highs. Chart 8 shows the same indicators over a three month timeframe for greater detail. A move above the early September high is needed to signal an expansion of new highs and turn this indicator bullish again.
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Chart 7
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Chart 8
Chart 9 shows Nasdaq Cumulative Net New Highs Line ($NAHL) with the 10-day EMA. This line rose from mid September 2010 to mid March 2011 and then from mid March to mid May. Yes, there was a quick dip below the 10-day EMA in mid March. Chartists might consider using a 20-day EMA with this indicator because Nasdaq stocks have higher betas (risk) and the Net New Highs line is more vulnerable to dips. Google beta risk stock for a more detailed explanation. After establishing a reaction low in June, the indicator peaked near its May high and turned down at the end of July. It went on to break the June low in early August and turn bearish. The line remains below its 10-day EMA and bearish overall.
