IWM AND MDY BREAK CONSOLIDATION RESISTANCE -- INDUSTRIALS SPDR EXCEEDS PRIOR HIGHS -- INTERNET ETF SURGES THROUGH FLAG RESISTANCE -- OIL FOLLOWS STOCKS HIGHER AS WTI MOVES ABOVE $90 -- TREASURY ETFS FIRM DESPITE RISK-ON ENVIRONMENT
IWM AND MDY BREAK CONSOLIDATION RESISTANCE... Link for todays video. The S&P 500 ETF and Dow Industrials SPDR broke consolidation resistance last week. Not to be left behind, the Russell 2000 ETF (IWM) and S&P MidCap 400 SPDR (MDY) followed suit with breakouts on Monday. With these breakouts, stocks extended their October surges to remain strong. Chart 1 shows IWM breaking falling wedge resistance with a move above 68 in early October. The ETF extended above 70 and then consolidated the last eight days. Todays big move broke above consolidation resistance to signal a continuation higher. Even though there is a potential resistance zone just ahead, the breakout remains bullish until proven otherwise. First, a sharp move back below 71 would question the breakout. Second, a move below last weeks lows would totally reverse the October uptrend. The indicator window shows the Price Relative (IWM:SPY ratio) turning up the last two days and breaking the trendline extending down from July. Small-caps are starting to show relative strength. Chart 2 shows the S&P MidCap 400 SPDR with similar characteristics.
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Chart 1
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Chart 2
INDUSTRIALS SPDR EXCEEDS PRIOR HIGHS... Chart 3 shows the Industrials SPDR (XLI) moving above its prior peaks with a surge above 33 today. As with the rest of the market, XLI has taken traders and investors on a wild ride this month. October started with a support break that turned into a bear trap (failed support break). A bullish engulfing formed the very next day and the ETF broke the July trendline a few days later. After a consolidation around 32, XLI continued higher the last two days. This consolidation-breakout sequence is bullish until proven otherwise. A quick move back above 32 would question bullish resolve, while a support break at 31 would be bearish. The indicator window shows the Price Relative on the verge of a breakout as well.
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Chart 3
INTERNET ETF SURGES THROUGH FLAG RESISTANCE... Chart 4 shows the FirstTrust Internet ETF (FDN) moving from a significant support break on October 3rd to a significant resistance break on October 24th. What a difference three weeks makes. There are some lessons to consider here. It is risky to sell or sell short on a support break when prices are oversold. Conversely, it is risky to go long on a resistance break with prices are overbought. Support and resistance breaks are important, but chartists also need to consider the risk-reward ratio. Even though FDN is up over 20% from its October low, the latest chart signal is bullish and it has yet be proven otherwise. After backing off the first resistance challenge last week, FDN formed a falling flag type consolidation and broke flag resistance with a surge above 33 the last two days. A quick move back below 33 would question the breakout. A move below last weeks lows would reverse the October uptrend.
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Chart 4
OIL FOLLOWS STOCKS HIGHER... Crude oil futures moved above $90 per barrel today and the US Oil Fund (USO) broke above its September highs. Chart 5 shows USO forging a lower low below 30 in early October and then surging above 35 the next three weeks. Oil is moving higher because confidence in the economy is improving, which is reflected in recent stock market performance. USO broke the trendline extending down from late April and exceeded the mid September highs. Notice that broken support turned into resistance at 35. The indicator window shows RSI hitting resistance in the 50-60 zone since early June. RSI broke above 60 with this October surge.
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Chart 5
Chart 6 shows Spot Light Crude ($WTIC) with weekly candlesticks. Oil advanced along with the stock market from summer 2010 to spring 2011. After peaking above 110, oil starting zigzagging lower with a falling channel taking shape. Todays move above 90 is challenging resistance from this falling channel. Needless to say, a clean breakout would be bullish for oil. This would also have bullish ramifications for the economy and stocks. Even though high oil prices can weigh on profits, rising demand seems to be the more important aspect when it comes to economic performance.
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Chart 6
TREASURY ETFS FIRM DESPITE RISK-ON ENVIRONMENT... Monday was mostly a risk-on day. I say mostly because US Treasuries actually held up well with the stock market so strong. The risk-on trade favors gains in stocks, commodities and the Euro, which are the riskier assets. Risk-off, on the other hand, favors Treasuries and the Dollar, which are viewed as the safe-havens. Gold remains dependent on the Dollar and therefore benefits in the risk-on environment right now. Even though stocks, oil and the Euro were up sharply on Monday, the 20+ year Bond ETF (TLT) and the 7-10 year Bond ETF (IEF) held relatively firm. TLT was up a fraction, while IEF was down a fraction. Chart 7 shows IEF breaking support with a move below 103 in early October and then stalling the last two weeks. Broken support turned into resistance around 103.50 and the late August lows marked support in the 102 area. These are the next levels to watch. A break above 103.5 would be bullish, but a break below 102 would be bearish.
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Chart 7
The indicator window shows IEF along with the S&P 500. These two are virtual mirror images. TLT plunged as the S&P 500 surged in early October. Even though the S&P 500 continued higher the last two weeks, IEF has traded flat and did not move lower. I would have expected IEF to move lower with such strength in the stock market. To quote Buffalo Springfield: Somethings happening here. What is aint exactly clear. Chart 8 shows TLT breaking support and establishing resistance with last weeks high.
