RISING FLAG BREAKDOWN REMAINS FOR SPY -- A POSSIBLE FALLING WEDGE AND A DEFINITIVE DOWNTREND -- NASDAQ RECOVERS AFTER BREAK BELOW AUGUST LOWS -- DELL, INTEL AND MICROSOFT LIFT NASDAQ -- NETWORKING ETF HOLDS AUGUST LOW WITH BULLISH ENGULFING
RISING FLAG BREAKDOWN REMAINS FOR SPY... Link for todays video. Stocks staged one heck of a come back in the final hour of trading on Tuesday. Actually, the rally was even shorter than that as the surge started around 3:10PM and carried on to the 4PM close. Despite this massive intraday reversal, nothing has changed on the weekly charts. In other words, stocks remain in a downtrend overall. Chart 1 shows the S&P 500 ETF (SPY) plunging below 110 early this week and recovering with a move back above 114. The ability to recover such a sharp loss is impressive, but the flag support break remains. At the very least, follow through with a weekly close above the lower flag trendline is needed to negate this support break. For now, the flag break remains and the downside target in the low 100s stands.
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Chart 1
The indicator window shows 14-period StochRSI moving into bear mode in March. I showed this indicator on Monday and nothing has changed here either. A surge above .80 shows enough buying pressure to signal the start of an up move. This signal remains in force until there is a move below .20, which triggers a bearish signal. The indicator surged above .80 in early August 2010 and remained bullish until early March 2011, when it plunged below the .20 threshold. Since moving into bear mode, the indicator has yet to even the .65 level. A surge above .80 would show a strong enough momentum surge to expect a rally.
A POSSIBLE FALLING WEDGE AND A DEFINITIVE DOWNTREND... Chart 2 shows the SPY with candlesticks over the last six months. Notice that prices are moving from the upper left of the chart to the lower right. Also notice that the ETF has a succession of lower lows (troughs) and lower highs (peaks). Overall, it is possible that a falling wedge is taking shape. While these patterns are potentially bullish because they can represent corrections, the trend is clearly down as long as they fall. SPY recently forged a lower low in early October and has yet to even challenge its first resistance level at 120. More likely, there is a resistance zone in the 120-123 area from the peaks extending back to late August. An uptrend requires a higher peak and SPY is not even close to such a breakout right now.
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Chart 2
The indicator window shows volume surging above 400 million shares with yesterdays reversal. Impressive volume for one day, but it was still below the levels seen in late September and August. In other words, it was not impressive enough. Also notice that the August 9th reversal occurred with over 700 million shares. SPY followed through on this reversal, but still failed to produce a lasting reversal and the ETF broke its August lows.
NASDAQ RECOVERS AFTER BREAK BELOW AUGUST LOWS... The Nasdaq also remains in bear mode after a big support break in early August, but the tech-laden index is holding up better than the broader market and showing relative strength. Chart 3 shows the Nasdaq forming a rising wedge after the big support break. Notice that this wedge retraced 61.80% of the prior decline and met resistance near broken support. This is classic technical analysis at work. The index went on to break wedge support last week and briefly broke the August lows this week. Tuesdays bullish engulfing prevented a clean break below the August lows**. Also notice that this bullish engulfing formed with the highest volume since early August. Even though support here is holding, I am not ready to overrule the rising wedge breakdown from last week. More bullish evidence is needed to counter the August support break and rising wedge breakdown.
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Chart 3
DELL, INTEL AND MICROSOFT LIFT NASDAQ ... Even though my overall outlook is bearish until proven otherwise, there are pockets of strength in the market worth noting. The Nasdaq is getting some upside leadership from a few old technology stocks. Anyone remember Wintel Dell? This was the term used to describe the grip Windows, Intel and Dell had on the PC business years ago. These three held up well during September-October and are showing upside leadership recently. Chart 4 shows Dell (DELL) bottoming in mid August and testing these lows throughout September and October. Dell, however, never broke these lows and formed two bullish engulfing patterns the last three weeks. The stock followed through on the last bullish engulfing with a high-volume surge above 15 today.
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Chart 4
Chart 5 shows Intel (INTC) breaking resistance with a big surge in mid September and broken resistance turning into support. This level held with a bullish engulfing pattern on Tuesday and follow through on Wednesday.
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Chart 5
Chart 6 shows Microsoft (MSFT) forming higher lows in August and again in October. Despite some pretty violent swings the last few months, the stock is holding up better than the broader market. MSFT formed a bullish engulfing to establish support at 24.25 this week.
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Chart 6
NETWORKING ETF HOLDS AUGUST LOW WITH BULLISH ENGULFING... The Networking iShares (IGN) is showing relative strength by holding its August low over the past week. This low represents a line-in-the-sand of sorts. Securities that broke their August lows or are trading below their August lows show relative weakness. Securities that did not break their August lows or that held above are showing relative strength. Chart 7 shows IGN holding its August low with a big bullish engulfing pattern. The ETF then followed through on this pattern with a surge above 26 today.
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Chart 7
In the indicator window, the Price Relative (IGN:SPY ratio) confirms relative strength. Notice how this indicator formed a higher low in early October and turned up the last two days. Even though IGN has a few positives working, the overall trend remains down. A rising wedge breakdown was the last chart signal. It is possible that a double bottom is forming from August to October with resistance at 29. A break above this level would confirm the pattern and reverse the overall downtrend. Turning bullish now is still a bottom picking exercise.
CISCO, BROADCOM AND MARVELL LEAD NETWORKERS... Within the networking group, there are a few stocks showing relative strength by holding above their August lows. Chart 8 shows Broadcom (BRCM) forming a bullish engulfing on Tuesday and moving over 4% higher on Wednesday. Even though the stock remains in a large trading range since June, it has been outperforming the S&P 500 the last three months.
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Chart 8
Chart 9 shows Cisco (CSCO) with an inverse Head-and-Shoulders pattern forming over the last four months. CSCO surged off the August low and then consolidated with support at 15. The stock never came close to the August low during the market decline. This shows relative strength. A break above the September high would confirm the inverse Head-and-Shoulders pattern and target further strength towards the 20 area. The height of the pattern is added to the neckline breakout for a target.
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Chart 9
Chart 10 shows Marvell Technology (MRVL) also with an inverse Head-and-Shoulders pattern working. The stock held well above its August lows in September-October and shows some serious relative strength. After surging to resistance, the stock pulled back last week and then formed a bullish engulfing on Tuesday. A break above the September highs would complete the inverse Head-and-Shoulders pattern.
