DOW SPDR HEADS FOR BIG TEST -- RETAIL SPDR SURGES TOWARDS RESISTANCE -- TREASURIES GET HAMMERED AFTER EMPLOYMENT REPORT -- OIL BOUNCES AS BONDS RETREAT -- OIL SERVICES HOLDRS CONTINUES TO UNDERPERFORM OIL
DOW SPDR HEADS FOR BIG RESISTANCE TEST... Link for todays video. Point & Figure charts are good for defining key support and resistance levels. In addition, P&F charts at StockCharts.com come with automatic trendlines that can be used to define the trend. Chart 1 shows a 1/2% P&F chart for the Dow Industrials SPDR (DIA). This means that each box represents 1/2%. Point-wise, the boxes at the top cover more points than the boxes at the bottom. However, each box, whether at the top or the bottom, represents 1/2%. This chart shows a Triple Bottom Breakdown and trendline break in early August. The ETF consolidated after this breakdown and then broke below support again in late September. The red 9 signals the start of September and the red A signals the start of October.
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Chart 1
The height of the August-October columns is truly extraordinary. Since the long O-Column in late July and early August, the ETF formed 13 columns with at least eight Xs or Os. With each box representing 1/2%, this means DIA had at least 13 swings that were 4% or more. Despite such volatile trading, this chart still paints a downtrend overall and a clear resistance zone. First, the ETF is well below the Bearish Resistance Line (red). Second, DIA formed a lower low in early October as it broke below the August low. Third, the ETF has yet to break above its prior X-Column, which would produce a Double Top Breakout. Fourth, there is a clear resistance zone marked by the late August high and September high. A move above these highs is needed to actually reverse the overall downtrend. Chart 2 and 3 show the S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ) for reference.
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Chart 2
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Chart 3
RETAIL SPDR SURGES BACK TOWARDS RESISTANCE ZONE... This weeks reversal and surge were especially impressive for the Retail SPDR (XRT). Just a few days ago, I wrote about the breakdown in XRT and its bearish consequences. XRT broke its September lows on Monday, but reversed on Tuesday and surged back towards its September highs. Am I ready to finish that crow pie and put on my horns? Not quite. As with the major index ETFs above, XRT still has a lot of resistance just ahead. Chart 4 shows the ETF turning back in the 50-50.5 zone three times in the last six weeks. A break above these highs is needed to forge a higher high and reverse this downtrend. The moment-of-truth of here as the ETF surged above 49 today and fell back today.
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Chart 4
The indicator window shows the Price Relative moving above its July high. XRT shows relative strength, which is a positive. It would be hard to argue with relative strength and a break above resistance on the price chart. Retail drives some 2/3 of GDP and such a move would be quite positive for the economy and the stock market. Chart 5 shows a 1/2% Point & Figure chart confirming resistance.
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Chart 5
TREASURIES GET HAMMERED AFTER EMPLOYMENT REPORT... A better-than-expected employment report put downside pressure on US Treasuries and upside pressure on interest rates. The Labor Department reported that non-farm payrolls grew 103,000 in September and the August numbers were revised upward. This report is notorious for revisions so expect these September numbers to change in a month. The combination brought out the bond bears as the chances of a recession faded. Even though economic growth may not be spectacular, a reduction in non-farm payrolls is usually needed to produce a recession.
Chart 6 shows the 20+ year Bond ETF (TLT) surging from 92.5 to 125 since late June. TLT was up 35% in about three months and without a decent correction. With the stock market reversal on Tuesday, TLT reversed at 125 and moved sharply lower the last four days. Treasuries are indeed ripe for a correction, but TLT has yet to even break the closest support at 115. A break below this level would argue for a deeper decline (correction) that could extend to the 105-110 area. Two Fibonacci Retracements Tools were used on this chart to highlight a Fibonacci cluster. One extends from February to October (gray) and the other from late June to October (blue). The yellow highlighted area shows two retracement zones that overlap in the 105-110 area. This would be the correction target for TLT.
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Chart 6
Chart 7 shows the 7-10 year Bond ETF (IEF) falling below 104 in early trading. Even with this weeks decline, the ETF remains above its mid September low, which marks first support. The Fibonacci Retracements Tool extends from February to September. A 38-50% retracement of this advance would extend to the 98-100 area, which is 4-6% below current levels. A lot may depend on the stock market because stocks and bonds have been negatively correlated the last few months. The indicator window for TLT shows the $SPX-TLT Correlation Coefficient in negative territory since mid June. The indicator window for IEF shows SPY in red and IEF in black. Bonds bottomed as stocks peaked in July. As noted above, DIA is nearing a major resistance zone. A failure at or near this resistance and move lower would be positive for bonds. Also note that the Fed is buying long-term bonds as part of operation Twist.
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Chart 7
OIL BOUNCES AS BONDS RETREAT AND STOCKS SURGE... Oil has been trending lower since the early May peak and remains in a clear downtrend. This does not, however, preclude counter-trend bounces. Most recently, oil bounced along with the stock market and bonds fell. Chart 8 shows the US Oil Fund (USO) zigzagging lower with a series of lower lows and lower highs. The most recent high established resistance at 35. After a lower low at 29, the ETF bounced back above 32 with a sharp move higher the last four days. At this point, the move still looks like an oversold bounce within a bigger downtrend. USO has yet to form a base and remains well below the September high.
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Chart 8
The indicator window shows USO with the 20+ year Bond ETF (blue). Notice how oil moved down from May to September and bonds moved higher. The decline in oil eases inflationary fears and this is positive for bonds. Bonds also benefitted from weakness in the stock market from late July to early October. A break above the September highs in stocks and oil would be bearish for bonds, but it hasnt happened yet. Chart 9 shows a 1/2% P&F chart with the Bearish Resistance Line confirming resistance near 35.
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Chart 9
OIL SERVICES HOLDRS CONTINUES TO UNDERPERFORM OIL... Some chartists look to the Oil Service HOLDRS (OIH) for clues on oil. These stocks tend to outperform oil in a bullish environment and underperform in a bearish environment. Chart 10 shows OIH peaking in February-March, forming a lower high in late July and plunging in August-September. The ETF rebounded with the stock market this week, but this looks like an oversold bounce within a downtrend for now. Broken support and the late July trendline mark first resistance in the 117 area.
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Chart 10
The indicator window shows OIH relative to Spot Light Crude ($WTIC). This is the Price Relative (OIH:$WTIC ratio). Notice how OIH outperformed as the ratio rose into late February. A period of underformance coincided with the Feb-Mar peak in OIH. The Price Relative also broke down in early August as OIH broke below its June low. OIH continues to underperform oil and this is a negative for oil. Chart 11 shows the Energy SPDR (XLE) hitting resistance from the broken support zone.
