STOCKS GIVE UP MOST OF THURSDAYS SURGE WITH SHARP DECLINE -- UTILITIES SECTOR HAS THE STRONGEST CHART -- EURO PLUNGES AS RUMOR BECOMES NEWS -- STRONG DOLLAR WEIGHS ON MATERIALS AND ENERGY SECTORS -- FRENCH AND GERMAN INDICES FOLLOW EURO LOWER
STOCKS GIVE UP MOST OF THURSDAYS SURGE WITH SHARP DECLINE... Link for todays video. Stocks took it on the chin Monday with a broad decline that affected all sectors. The Euro kicked things off with a sharp decline. This move put the market in risk-off mode, which means money moves into Treasuries and the Dollar as a safe-haven. Risk-off mode is bearish for stocks and commodities. Chart 1 shows the Russell 2000 ETF (IWM) hitting resistance at broken support and plunging back below 75 on Monday. Also notice that the falling 200-day moving average marks resistance in this area. The October advance was one of the sharpest on record as the ETF moved from 60 to 77 in less than four weeks (~28%). This is, of course, a massive move that created a short-term overbought condition. A pullback is warranted after such a strong advance, but the suddenness and depth of todays pullback is disconcerting. Even so, it is not enough to reverse the October upswing or negate the late October breakout. Broken resistance turns into support to mark the first test in the 72-73 area. Chart 2 shows SPY with broken resistance marking the first support test in the 122-124 area.
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Chart 1
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Chart 2
UTILITIES SECTOR HAS THE STRONGEST CHART... Chart-wise, the Utilities SPDR (XLU) remains the strongest of the sector SPDRs. There are several ways to measure relative strength or weakness. Chartists can use the Price Relative, which is a ratio chart (XLU:SPY). Chartists can use a PerfChart to compare the percentage gain. Chartists can also compare the price charts of two or more securities. Of the nine sector SPDRs, the Utilities SPDR is the only one trading above its summer highs. The Consumer Staples SPDR (XLP) and the Technology SPDR (XLK) are close to these highs, but have yet to break out. As the only one above its summer highs, XLU clearly shows the most chart strength. Chart 3 shows XLU breaking above resistance in September, falling back and breaking back above in October. The ETF hit a new 52-week high last week with the surge above 35.
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Chart 3
The indicator window shows the Stochastic Oscillator (250,3). There are roughly 250 trading days in a year so this indicator covers rolling one year periods. The Stochastic Oscillator measures the level of the close relative to the high-low range over the given period. A 250-day Stochastic Oscillator measures the level of the close relative to the 250-day high-low range. The closer the Stochastic Oscillator is to 100, the closer price is to its 52-week high. The closer to 0, the closer price is to its 52-week low. Chartists can use these values to compare chart strength for a group of securities. XLU currently has the highest 250-day Stochastic Oscillator value of the nine sector SPDRs. Chart 4 shows weekly prices and a long rising price channel for XLU. Utilities may not be the most dynamic companies, but they do offer stability and income.
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Chart 4
EURO PLUNGES AS RUMOR BECOMES NEWS... The Euro moved sharply lower on Monday in what could be considered a classic buy-the-rumor and sell-the-news scenario. Rumors of a big plan to combat the EU debt situation swirled through the markets for most of October. Speculation was especially rampant the last two weeks. Chart 5 shows the Euro Currency Trust (FXE) moving higher in anticipation of last weeks EU summit. The advance climaxed with Thursdays surge above 141. In fact, this may be a buying climax. After a little consolidation on Friday, the Euro moved sharply lower on Monday with a plunge back below 138. Last weeks surge above 140 was immediately negated with todays plunge. At this point, I am inclined to leave my resistance zone around 139-140. This zone stems from broken support and the 61.80% retracement. As far as the October upswing is concerned, I see support just above 137 from last weeks spike low. A move below this level would reverse this upswing and put the Euro back in bear mode.
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Chart 5
Chart 6 shows weekly candlesticks with the broken trendline turning into resistance. This is a classic tenet of technical analysis: broken support turns into resistance. We can also apply this to a trendline extension. FXE broke the trendline with a sharp decline in August. An extension of this trendline now marks resistance in the 142 area and the ETF hit this level last week. A blue dotted trendline defines the downtrend since spring 2011. A move above this trendline would provide the first sign that the longer term downtrend is reversing. The indicator window shows StochRSI surging above .60 with this weeks move. This surge is bullish for momentum as long as StochRSI holds above .40. It could, however, be a whipsaw.
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Chart 6
STRONG DOLLAR WEIGHS ON MATERIALS AND ENERGY SECTORS... Strength in the Dollar weighed on commodity prices, which in turn weighed on the Basic Materials SPDR (XLB) and the Energy SPDR (XLE). Chart 7 shows XLB hitting resistance in the 36 area. Resistance here stems from broken support, the late August high and a 61.80% retracement of the July-October decline. XLB opened weak and close weak to form a black (filled) candlestick. Also notice that the ETF moved into Thursdays gap zone.
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Chart 7
Chart 8 shows the Energy SPDR pretty much filling Thursdays gap with a close below 70. This suggests that Thursdays surge was a buying climax of sorts. The gap and big move above 72 did not hold very long. A filled gap after a sharp advance is considered an exhaustion gap. As with most of the stock market, XLE was overbought after the October surge and ripe for a pullback or consolidation.
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Chart 8
FRENCH AND GERMAN INDICES FOLLOW EURO LOWER... Even though the October uptrend has yet to be reversed, the French CAC Index ($CAC) and German DAX Index ($DAX) hit some key retracement areas that should concern chartists. Chart 9 shows the $CAC hitting the 50% retracement level on Friday. Chart 10 shows the $DAX hitting the middle of the 50-61.80% retracement zone. Both indices formed steep rising wedges with the October surge. A break below the lower trendlines would show a momentum loss. The mid October lows mark key support. Breaks below these levels would reverse the October uptrend and could has some seriously bearish consequences. First, it would mean that the October high was a lower high (below the summer high). Second, a lower high means the bigger downtrend is continuing. Third, a continuation of the bigger downtrend would target a move below the September lows.
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Chart 9
