SPY AND DIA MAKE BREAKOUT BIDS -- CONSUMER DISCRETIONARY SECTOR LEADS HIGHER -- STEEL ETF AND AIRLINE ETF FORM FLAG CONSOLIDATIONS -- HOMEBUILDING ETFS GO FROM LAGGARDS TO LEADERS
SPY AND DIA MAKE BREAKOUT BIDS... Link for todays video. Stocks came charging out of the gates on Friday with the Dow Industrials SPDR (DIA) and the S&P 500 ETF (SPY) making breakout bids. Chart 1 shows DIA gapping above 116 on the open in a bid to break resistance. Broken support, the September 1st high and the 50-61.80% retracement zone all point to resistance at current levels. Despite resistance, it is hard to argue with the strength of the October surge and the ability to hold gains throughout the week. DIA moved sharply lower on Monday with a long black candlestick, but rebounded on Tuesday and is trading above Tuesdays high today. Talk about resilience. Tuesdays low marks the first support level to watch for signs of weakness.
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Chart 1
The indicator window shows Aroon (20) with Aroon (Up) in green and Aroon (Down) in (red). Looking for surges to 100 is one way to use this indicator. A surge to 100 signals the start of a new trend. An uptrend is emerging when Aroon (UP) surges to 100. This signal remains valid until countered when Aroon (Down) surges to 100. Notice that Aroon (Up) surged to 100 on October 12th. This surge officially countered the Aroon (Down) surge to 100 in late July. In other words, Aroon (Down) hit 100 on July 29th and this signal was not reversed until Aroon (Up) surged to 100 on October 12th. You can read more on Aroon in our ChartSchool Article. Chart 2 shows SPY with similar characteristics.
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Chart 2
CONSUMER DISCRETIONARY SECTOR LEADS HIGHER... All sectors were up early Friday with the Consumer Discretionary SPDR (XLY) at the top of the leader board. Chart 3 shows XLY gapping up and surging above 39 early Friday. This ETF has cleared resistance from broken support, the mid September high and the 61.80% retracement level. Even though XLY is now up over 15% from its October 4th low, it shows no signs of material weakness. There were two long black candlesticks this week, but the ETF recovered immediately and is trading at its high for the month. Note that a dark cloud pattern formed on Tuesday-Wednesday and it was never confirmed with a short-term support break. Support remains at 37.50 (Tuesdays low).
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Chart 3
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Chart 4
Chart 4 shows the Retail SPDR (XRT) gapping up and surging above 52. The ETF battled resistance around 50.50 the prior seven days and broke through with todays surge. The ETF is also short-term overbought, but showing no signs of weakness. The consolidation around 50.50 showed indecision. Todays breakout provided a bullish resolution to this consolidation. Tuesdays low marks support at 49. The indicator windows for both XLY and XRT show the Price Relative. The XLY:SPY ratio and the XRT:SPY ratio hit new highs today. These two continue to show relative strength and power the market.
STEEL ETF AND AIRLINE ETF FORM FLAG CONSOLIDATIONS... Bull flags form after a sharp advance and mark a rest within the ongoing trend. In other words, they are bullish continuation patterns. There are two types of bull flags. A falling flag forms as a short pullback. A flat flag forms as a sideways trading range. Chart 5 shows the Steel ETF (SLX) with a falling flag forming over the last 7-8 days. This marks a short pullback after the early October surge. The ETF is making a breakout attempt today with a gap and move above the upper trendline. This gap is short-term bullish as long as it holds. A filling of the gap would negate this flag breakout. It is also worth pointing out that this bull flag is forming in the context of a bigger downtrend. Even though we could see a short-term continuation higher, there are still significant headwinds for the bulls over the longer timeframe.
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Chart 5
Chart 6 shows the Airline ETF (FAA) with a surge to resistance and a flat flag the last 7-8 days. First, notice that FAA broke support and this support break failed to hold. This bear trap is a positive sign. Second, the October surge broke above the trendline extending down from early July. The ETF is now consolidating near resistance extending back to mid August. A flag breakout would signal a continuation higher and break an important resistance level. Failure at resistance and a move below flag support would be bearish.
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Chart 6
HOMEBUILDING ETFS GO FROM LAGGARDS TO LEADERS... The Home Construction iShares (ITB) and the Homebuilders SPDR (XHB) were leading the market lower just a few weeks ago. Both broke support at the beginning of October, but these support breaks failed to hold. Not only did the ETFs recover their support breaks, but they also surged above their late August highs. The October advances in ITB and XHB are two the biggest moves this month. Chart 7 shows XHB breaking above resistance by surging over 25% from its October 4th low. This is a powerful move. The indicator window shows the Price Relative breaking above its late August high, which means XHB is starting to show relative strength. It is outperforming the S&P 500 for the first time in a long time. After big move, both XHB and ITB are very overbought and ripe for a pullback or consolidation. Even if this surge marks the start of a sustainable uptrend, there will still be corrections and continuation patterns along the way. There is no sense chasing an overbought security. This is like forcing a shot in basketball or trying to hit a bad pitch in baseball. Let the market come to you by waiting for a pullback or corrective pattern to unfold. Chart 9 shows ITB with similar characteristics.
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Chart 7
