DOW INDUSTRIALS AND TRANSPORTS TURN BACK AT RESISTANCE -- WELLS FARGO WEIGHS ON THE FINANCE SPDR -- DOLLAR ETF BOUNCES NEAR BROKEN RESISTANCE -- GOLD FOLLOWS DOLLAR LOWER -- SILVER ETF STALLS AT RESISTANCE
DOW INDUSTRIALS AND TRANSPORTS TURN BACK AT RESISTANCE... Link for todays video. Stocks moved lower on Monday with a broad decline hitting all sectors. Financial media blamed the decline on comments from German Chancellor Merkel, who poured cold water on the prospects for a comprehensive solution to European debt issues. Whatever the reason, there were more sellers than buyers today and the major indices moved lower. Chart 1 shows the Dow Industrials surging past 11600 on Friday and moving back below 11400 with todays decline. Resistance in the 11600-11800 area stems from broken support levels and the 50-61.80% retracement zone. Yes, we have seen a chart like this before. Despite a 1200 point surge (low to high) in early October, the bigger downtrend remained in place as long as this resistance zone held. Todays decline reinforces resistance to keep the bigger downtrend in play. The indicator window shows MACD moving into positive territory last week. A move back into negative territory and below the signal line would be bearish for momentum.
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Chart 1
Chart 2 shows the Dow Transports hitting resistance in the 4700-4800 area for the fourth time since mid August. This resistance zone is just below the prior two support breaks. Resistance at 4800 is further confirmed by a 50% retracement of the July-October decline. Todays 2+ percent decline reinforces resistance. By the way, a move above resistance in both the Dow Industrials and Dow Transports would produce a Dow Theory buy signal. Dow Theory moved to a sell signal when both Dow Averages moved below support levels in early August. This signal remains in force until proven otherwise.
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Chart 2
WELLS FARGO WEIGHS ON THE FINANCE SPDR... Banks were once again in the spotlight on Monday. Wells Fargo (9.42%), which is the biggest component in XLF, moved sharply lower after reporting earnings. Chart 3 shows the Finance SPDR (XLF) hitting resistance in the middle of the prior consolidation (blue circle). After a sharp decline in July-August, the ETF consolidated between 11.75 and 13.5 for several weeks. This is basically one big congestion zone that acts as resistance. Even though XLF surged over 10% in early October, the ETF never made it past the mid September high and remains in a downtrend overall. The indicator window shows the Price Relative (XLF:SPY ratio) in a downtrend as XLF continues to show relative weakness. Chart 4 shows Wells Fargo (WFC) failing to hold its resistance breakout and gapping lower on Monday.
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Chart 3
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Chart 4
Weakness in the finance sector extended to the regional banks. Chart 5 shows the Regional Bank SPDR (KRE), which is a broad based ETF that consists of 51 regional banks. It represents a good cross-section of the regional banking sector because the largest weighting is just 3.02% (BPFH). The Regional Bank SPDR hit resistance around 22 last week and declined over 3% today. This affirms resistance and a move above the October high is needed for a breakout.
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Chart 5
DOLLAR ETF BOUNCES NEAR BROKEN RESISTANCE... The markets turned to the risk-off trade on Monday with money moving out of stocks, the Euro and oil. Money found its way into the risk-aversion assets: the Dollar and Treasuries. Chart 6 shows the US Dollar Fund (UUP) getting a bounce near broken resistance and the 50% retracement (yellow area). I showed this level last week, but the ETF overshot with a decline on Friday. Todays bounce keeps this support zone in play. More importantly, the bigger trend is up after the Double Bottom breakout in September. This decline looks like a post-breakout throwback. It is not uncommon for prices to return to the resistance breakout with a pullback, which is called a throwback. The indicator window shows RSI hitting support in the 40-50 zone. Notice how the 50-60 zone acted as resistance during the downtrend. With the bigger trend considered up, I am looking for the 40-50 zone to act as support.
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Chart 6
Weakness in the Euro is the main reason for strength in the Dollar. Weakness in European banks and sobering comments from Merkel weighed on the Euro. Chart 7 shows the Euro Currency Trust (FXE) hitting resistance in the Fibonacci cluster zone put forth last week. To recap, two Fibonacci Retracements Tools can be drawn when it is difficult to single out one move upon which to base the tool. The overall trend is considered down for the Euro and this failure at resistance could signal a continuation of that trend. With the Euro and stocks positively correlated, this would be negative for the stock market.
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Chart 7
GOLD FOLLOWS DOLLAR LOWER... Strength in the Dollar weighed on gold, which has been moving higher since late September. Chart 8 shows the Gold SPDR (GLD) hitting support in the 155 area and moving above 160. While the bounce off support is holding, the pattern taking shape looks like a rising flag, which is bearish. Bear flags form as small rises after a sharp decline, while bull flags form as small declines after a sharp advance. A move below the lower trendline would be the first negative and a break below 155 would end the short-term uptrend. This would signal a continuation of the September decline and target a move to the next support zone in the 143-145 area.
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Chart 8
SILVER ETF STALLS AT RESISTANCE ... Chart 9 shows the Silver Trust (SLV) surging above 30 last week and consolidating the last 5-6 days. Overall, the bigger trend is down after SLV broke down in mid September and Aroon Down (red) surged to 100. Even though Aroon Down has moved lower, we have yet to see Aroon Up cross above Aroon Down or Aroon Up surge to 100, which would be bullish. On the price chart, SLV is meeting resistance from broken support around 32. A move above this level would break the short consolidation and be quite positive. Lets see the breakout first. You can read more about Aroon in our ChartSchool Article.
