SPY CHALLENGES RESISTANCE AGAIN -- S&P 500 EQUAL WEIGHT ETF STILL SHOWS RELATIVE WEAKNESS -- ELLIOTT WAVE SUGGESTS AN ABC CORRECTION IN PROGRESS -- TECHNOLOGY, CONSUMER DISCRETIONARY AND UTILITIES LEAD -- TREASURIES EXTEND DECLINE AFTER RETAIL SALES JUMP
SPY CHALLENGES RESISTANCE AGAIN... Link for todays video. Chart 1 shows the S&P 500 ETF (SPY) moving back above 121 in early trading on Friday and once again challenging resistance. Resistance here stems from broken support and the prior peaks in late August and mid September. So far, we have yet to see a breakout that would forge a higher peak. Even though the surge from 108 to 122 was very strong, SPY is short-term overbought and still ripe for at least a pullback or consolidation period.
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Chart 1
S&P 500 EQUAL WEIGHT ETF STILL SHOWS RELATIVE WEAKNESS ... Chart 1 shows the Rydex S&P Equal Weight ETF (RSP) falling just short of its resistance zone on Friday. The indicator window shows the Price Relative, which is the RSP:SPY Ratio. This ratio rises when RSP outperforms SPY and falls when RSP underperforms SPY. These two ETFs are good to compare because they represent the same stocks, just with different weightings. SPY is a market capitalization weighted ETF. The top components are Apple (3.45%), Exxon Mobil (3.39%), IBM (2.04%), Microsoft (1.79%) and Chevron (1.79%). The Rydex S&P Equal Weight ETF, on the other hand, treats all stocks as equals. This means Tellabs and AK Steel, which have a combined market cap of less than $3 billion, carry the same weight as Apple and Exxon Mobil, which have a combined market cap in excess of $700 billion. RSP favors small and mid-caps stocks, while SPY favors large-caps. Small-caps are an important part of the market. Relative strength in small-caps is a positive for the market, while relative weakness is a negative. The Price Relative rose into May as RSP (small-caps) outperformed SPY (large-caps). Things changed in early July as a lower high formed and the Price Relative broke down. Small-caps have been showing relative weakness the last three months. Even with the October surge, the Price Relative remains in a downtrend and has yet to break the July trendline.
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Chart 2
ELLIOTT WAVE SUGGESTS AN ABC CORRECTION IN PROGRESS... John Murphy noted last week that the S&P 500 had completed a 5-Wave decline and looked poised for a fourth quarter rebound. Chart 3 shows the S&P 500 ETF with a review of the 5-Wave decline. Notice that Wave-5 of a larger degree (red) breaks down into a 5-Wave decline of one lesser degree. The end of the larger 5-Wave decline now calls for a corrective advance. Based on Elliott Wave Theory, corrective moves often form as three wave zigzags. This means we could see an ABC Zigzag form in October-November. If this is indeed the case, then Wave A is currently underway with the surge off 110. We have yet to see a pullback that would mark Wave B though. With the index at resistance and short-term overbought, the odds of a pullback or consolidation are increasing. After a Wave B pullback, a zigzag correction would then call for a Wave C higher. Wave A and Wave C are often equal. Therefore, when we know the length of Wave A and the low of Wave B, we can project the high for Wave C. Also note that chartists can use the Fibonacci Retracements Tool to make a projection. An ABC correction could retrace 61.80% of the prior decline, which was from 136 to 110. This would entail a move to around 126 before all is said and done.
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Chart 3
TECHNOLOGY, CONSUMER DISCRETIONARY AND UTILITIES LEAD... The Technology ETF (XLK), the Consumer Discretionary SPDR (XLY) and the Utilities SPDR (XLU) are the best performing sectors since early August. There are nine sector SPDRs. Stocks in these ETFs come from the S&P 500 and these ETFs are weighted by market capitalization, which means they favor large-caps. Chart 4 shows the Sector PerfChart since August 8th, which marks the early August closing low for the S&P 500. Even though most sector SPDRs broke their early August lows, this break did not last long because of the sharp reversal on Tuesday, October 4th. I am, therefore, using the August low as the starting point to get an idea of performance since the sharp decline in late July and early August. Unsurprisingly, all sectors and the S&P 500 are up since August 8th. The Technology SPDR, Consumer Discretionary SPDR and Utilities SPDR are the clear leaders. Relative strength in XLY and XLK is positive for the market. Consumer discretionary is the most economically sensitive sector and technology represents the appetite for risk. Both are up double digits from their August low. It is a bit surprising to see XLU up strongly because it is a defensive sector. However, this is overshadowed by relative strength in two key offensive sectors (XLY and XLK).
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Chart 4
The Energy SPDR (XLE), Basic Materials SPDR (XLB) and Finance SPDR (XLF) are lagging the market over this period. Unsurprisingly, the finance sector remains a drag on the overall market. This could be helping other sectors as money avoids the finance sector. In other words, money earmarked for the stock market is finding its way into the other eight sectors. XLE and XLB are lagging because they were hit the hardest in August-September.
TREASURIES EXTEND DECLINE AFTER RETAIL SALES JUMP... The Commerce Department reported that retail sales increased 1.1% in September. This better-than-expected number triggered further selling pressure in Treasuries. Treasuries surged in August-September as recession fears gripped the market. Last weeks employment report and todays retail sales report alleviated recession fears, which is why the bond market is making an adjustment. Chart 5 shows the 7-10 year Bond ETF (IEF) breaking below its mid September low on Monday and staying below this break. Treasuries were poised for a correction after an extraordinary advance from February to September. There was a small double top around 106 and this weeks breakdown argues for a deeper pullback. Only a sharp move back above this support break would suggest otherwise. The Fibonacci Retracements Tool shows the potential support levels to watch. In particular, the 97 area marks broken resistance and sits in the 50-62% retracement zone. Chart 6 shows the 20+ year Bond ETF (TLT) with a Fibonacci cluster in the 105-110 area.
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Chart 5
