MARKING KEY SUPPORT LEVELS FOR THE OFFENSIVE SECTORS -- CONSUMER DISCRETIONARY SPDR HOLDS RESISTANCE BREAKOUT -- TECHNOLOGY SECTOR LAGGING THE PAST MONTH -- TREASURY BOND ETFS BREAK FALLING WEDGE RESISTANCE
MARKING KEY SUPPORT LEVEL FOR THE OFFENSIVE SECTORS... Link for todays video. Earlier this week I noted that the Nasdaq 100 ETF, the Russell 2000 ETF and the S&P 500 ETF were testing broken resistance. The October surges produced breakouts and it was important that these resistance breakouts hold. Basic technical analysis teaches us that broken resistance levels turn into support. Failure to hold these breakouts would be a sign of weakness. Looking at the key offensive sectors, I see similar support levels from broken resistance. These levels are holding as these SPDRs established similar support zones with the lows of the last few weeks. Chart 1 shows the Consumer Discretionary SPDR (XLY) breaking a resistance zone around 38 and this zone turning into a support zone. A break below 37.5 would reverse the October upswing and negate the October breakout. The indicator window shows the Price Relative trending higher. Notice that this indicator is testing trendline support. A break would indicate that the consumer discretionary sector was moving from leader to laggard. Chart 2 shows the Technology SPDR (XLK) with similar characteristics.
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Chart 1
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Chart 2
Chart 3 shows the Industrials SPDR (XLI) breaking is prior peak (resistance) with a move above 33 in October. The ETF pulled back below 33 on Tuesday, but immediately bounced back later this week. There is a bull versus bear battle raging in the 33 area. The bulls have the edge because the resistance breakout is largely holding. In keeping with the tenets of Dow Theory, a breakout is valid until proven otherwise. At the very least, it would take a move below 32 to negate the breakout.
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Chart 3
The Finance SPDR (XLF) may be the key player here. Chart 4 shows XLF breaking its prior peak with a surge above 13.50 in late October, but quickly falling back below 13 early this week. Like the rest of the market, there is a battle near current levels for control of the trend. I am giving this ETF a little buffer and setting support at 12.75. A break below this level would suggest a breakout failure and further weakness ahead. Looking ahead the next few days, and perhaps weeks, chartists can watch these support levels for all four SPDRs. If/when three of the four break support, the market would clearly be reversing for a move lower. For now, the breakouts are holding and this favors the bulls until proven otherwise.
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Chart 4
TECHNOLOGY SECTOR IS LAGGING THE BROADER MARKET ... PerfChart 5 shows the performance of the nine sector SPDRs relative to the S&P 500. Even though the market is up sharply the past month, the Technology SPDR has not been keeping pace and sports a smaller gain than the S&P 500. This is why the relative strength PerfChart shows XLK as negative (-1.12%). These percentage numbers are found by subtracting the percentage change in the S&P 500 from the percentage change in XLK. Relative performance is negative when the XLK percentage change is less than the $SPX percentage change. Also notice that the Consumer Discretionary SPDR (XLY) is barely positive, which means this sector has barely outperformed the S&P 500. Relative weakness in technology and weak leadership from the consumer discretionary sector is a concern. However, the Industrials SPDR (XLI) and the Finance SPDR (XLF) are picking up the slack with relative strength.
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Chart 5
The Energy SPDR (XLE) and Basic Materials SPDR (XLB) are the big outperformers or leaders over the past month. XLE is outperforming by a whopping 11.46%, while XLB is outperforming by 8.16%. Also notice that the defensive sectors, utilities, healthcare and consumer staples, are underperforming. This means their gains are less than the gains of the S&P 500. Relative weakness in the defensive sectors favors the risk-on environment.
TREASURY BOND ETFS BREAK FALLING WEDGE RESISTANCE... Treasuries are integral to the market shifts between risk-on and risk-off. Treasuries, and the Dollar, are viewed as relative safe-havens that favor the risk-off trade. In fact, the Dollar and Treasuries have enjoyed a strong positive correlation the last two months. The indicator window in chart 6 shows the Correlation Coefficient moving above .75 in early September and remaining strongly positive. This means that Treasuries and the Dollar are moving in the same direction. On the price chart, the 20+ year Bond ETF (TLT) broke above wedge resistance with a surge on Monday and Tuesday. This was a fear surge stemming from concerns over the European debt issues. Fear subsided the last three days as TLT moved back below the breakout. Was this just an overdone fear pop or a solid breakout? A little throwback is normal after such a strong surge. Moreover, the big trend for Treasuries is up. At this point, I think the breakout is largely holding and TLT should firm around 114-115. A lot depends on what happens with stocks and the Dollar. Breakdowns in the sector SPDRs shown above would push money into Treasuries, as would a surge in the greenback. For now, these sector SPDR breakouts are holding and this could be negative for Treasuries.
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Chart 6
Chart 7 shows the 7-10 year Bond ETF (IEF) breaking wedge resistance and actually holding this breakout. The indicator window shows the Correlation Coefficient in negative territory since mid May. This confirms the inverse relationship between stocks and Treasuries. Stocks advance as Treasuries decline and visa versa.
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Chart 7
CRUDE BREAKS CHANNEL AND DOUBLE BOTTOM RESISTANCE... Oil is part of the market switch from risk-off to risk-on mode. Oil is also sensitive to the prospects for economic growth, which affects demand for energy. Rising oil prices favor a strong economy, while falling oil prices are more indicative of a weak economy. Chart 8 shows Spot Light Crude ($WTIC) breaking resistance with a surge above 91 towards the end of October. Crude has since consolidated, but this breakout is largely holding. I am marking a support level at 88. A move below this level would negate the breakout and put oil back in risk-off mode. Chart 9 shows weekly prices to put this recent breakout in perspective. Notice that crude formed a falling channel and a Double Bottom just above 75. The surge above 91 broke channel resistance and the intermittent high of the Double Bottom. No wonder the energy sector is strong.
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Chart 8
