STOCKS SHOW LOTS OF MOVEMENT AND NO REAL CHANGE -- DECLINE IN ADX REFLECTS LACK OF TREND IN SPY -- XLK AND XLY FAIL AT KEY RETRACEMENTS -- RETAILERS HOLD THE KEY TO XLY -- NYSE AD VOLUME LINE BREAKS AUGUST LOW
STOCKS SHOW LOTS OF MOVEMENT AND NO REAL CHANGE... Link for todays video. It is clear that the short-term trend is being influenced by news, hope and fear, all of which are four letter words. Chart 1 shows the S&P 500 ETF (SPY) since August 8th. The Zigzag (5) indicator has been added to show swings that are 5% or more. A Zigzag plotted on a bar or candlestick chart uses the highs and lows, as opposed to the close. A Zigzag plotted on a close-only chart uses the close, which reduces volatility somewhat. According to the Zigzag, there have been nine swings (high to low or low to high) that were 5% or more in the last eight weeks. That is more than one per week. Talk about volatility. Moreover, notice that SPY has crossed the 116.5 level more than a dozen times. Incidentally, SPY has traded between 110 and 123 during this timeframe and 116.5 marks the midpoint. Basically, we have seen at least nine sizable moves and little change over the last eight weeks. Trying to play every move within this consolidation is a recipe for whipsaw, burnout and head-banging. With 4-5 day volatility so high, chartists should consider stepping back to look at the bigger picture. How does this consolidation look on a weekly chart or a one-year bar chart?
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Chart 1
DECLINE IN ADX SHOWS LACK OF TREND IN SPY... Chart 2 shows that this eight week consolidation looks like a triangle on the one-year bar chart. Moreover, this is a mere consolidation after the August breakdown. SPY has done nothing to prove this August breakdown otherwise. In other words, the August breakdown was a bearish event and this bearish event remains the main event until supplanted by a bullish event. A consolidation is a neutral event at best. It would take a break above the triangle highs, with good volume and bread I might add, to produce a bullish event. Barring such an event, the bears rule the roost and a downside continuation is expected at some point.
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Chart 2
The indicator window shows the Average Directional Index (ADX) with Plus Directional Movement (+DM) in green and Minus Directional Movement (-DM) in red. First, notice how ADX (black) moved down as the consolidation extended. This indicator measures the strength of the trend. A falling ADX indicates a weakening trend (trading range). A rising ADX suggests that the trend is strengthening. Keep in mind that ADX does not have an upside or downside bias. It is direction neutral. 14-day ADX is currently around 20, which shows a weak trend over the last few weeks. An upturn from here would signal that the trend was strengthening. +DI and DI are used for directional bias. Notice that DI moved above +DI in late July and has remained above for two months. Even with the triangle consolidation, +DI was never strong enough to overtake DI. This shows a downward bias in the current trend and suggests that an upturn in ADX would be accompanied by a continuation lower.
XLK AND XLY FAIL AT KEY RETRACEMENTS... While SPY has traded flat the last eight weeks, the Consumer Discretionary SPDR (XLY) and the Technology ETF (XLK) have been rising. Their Price Relatives, XLK:SPY and XLY:SPY ratios, have also been rising the last several weeks. Relative strength in these two key sectors is a big reason we have yet to see a breakdown in SPY already. Chartists, therefore, should be watching these two closely for signs of weakness that could trigger broader market weakness. Chart 3 shows the Technology ETF (XLK) with a massive triple top that extends from January to July. After breaking triple top support with the August decline, the ETF retraced 61.80% with a rising flag. This could be considered a rising channel on the daily chart and a rising flag on the weekly chart. Regardless of the interpretation, a move below the lower trendline and the late September low would signal a continuation of the July-August decline. This would target further weakness towards the 21 area.
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Chart 3
Chart 4 shows the Consumer Discretionary SPDR with a breakdown in early August and similar retracement rally from early August to late September. This rally failed in the 50-61.80% retracement zone. For the second time in two weeks, the ETF broke below the rising flag trendline this week. Further weakness below the September lows would completely reverse the eight week advance and argue for a continuation of the July-August decline. Treating this as a rising flag pattern or measured move, the downside estimate would be to around 30. The length of the first decline (41.5 33.5 = 8) is subtracted from the high (38 8 = 30) for a target.
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Chart 4
RETAILERS HOLD THE KEY TO XLY... Retail is the most influential industry group in the consumer discretionary sector. Retail spending is also one of the most important economic indicators and a big contributor to GDP. Chart 5 shows the Retail SPDR (XRT) breaking down in August to turn bearish overall. As with XLY, the Retail SPDR rebounded and retraced just over 50% of the prior decline. Notice how the ETF met resistance around 50 at least three times since late August. These highs mark an important resistance level. A break above this level would call for a reassessment of the bearish case. With the overall outlook still bearish, a continuation of the July-August decline is expected at some point. A move below the September lows would signal the start of that point. A breakdown in XRT would lead to a breakdown in XLY, which in turn would weigh heavily on the broader market.
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Chart 5
NYSE AD VOLUME LINE BREAKS AUGUST LOW... The NYSE AD Volume Line and the NY Composite both broke below their August lows last week. Even though these two recovered somewhat this week, the support breaks and lower lows remain. Chart 6 shows the NYSE AD Volume Line breaking a big support zone at the end of July (the 29th to be exact). A consolidation formed after this sharp decline and the indicator broke the August lows last week. This also forged a new 52-week low. New lows are bearish, pure and simple. The August highs now mark a significant resistance level. A move above these highs would argue for a reassessment of the current downtrend in the AD Volume Line.
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Chart 6
AROON DOWN TRIGGERS BEARISH SIGNAL IN NY COMPOSITE... Chart 7 shows the NY Composite ($NYA) with a Head-and-Shoulders reversal extending into July and a neckline break in early August. After the sharp decline, the index consolidated with a volatile range between 6800 and 7600. The index broke this range with the decline last week, but quickly recovered with a move back above 6800. Despite this recovery, the Aroon oscillator suggests that that a new down move is emerging. Aroon means dawns early light in Sanskrit. Developed by Tushard Chande, this indicator is designed to signal when new up moves or down moves are emerging. A surge to 100 in Aroon Up (green) suggests a new uptrend, while a surge to 100. Notice that Aroon Up did NOT hit 100 in early September. Moreover, Aroon Down hit 100 twice in the last three weeks. This indicates more downside pressure than upside pressure. You can read more on Aroon in our ChartSchool Article .
