IWM CHALLENGES PENNANT TRENDLINE -- FINANCE SECTOR SHOWS RELATIVE WEAKNESS -- FINANCE SPDR TESTS SUPPORT -- LIBOR MOVES SHARPLY HIGHER -- US AND UK STOCKS OUTPERFORMING EUROPEAN STOCKS -- GERMAN DAX HOLDS KEY SUPPORT LEVEL
IWM CHALLENGES PENNANT TRENDLINE... Link for todays video. Stocks were mixed most of Wednesday, but small-caps were showing some relative strength with modest gains. Chart 1 shows the Russell 2000 ETF (IWM) breaking resistance in late October and then consolidating the last few weeks. There are reasons to expect resistance in the 77 area. Broken support and the 61.80% retracement zone potential resistance here. However, the ETF broke wedge resistance with the October surge and formed a bullish continuation pattern the last three weeks. A move above pennant resistance (76) would signal a continuation higher and target a move to the summer highs (84-85). Should IWM break pennant resistance, it is important that the breakout holds and the ETF continues higher. Failure to hold the breakout would be quite negative, while a support break would clearly reverse the October-November uptrend. Chart 2 shows the S&P 500 ETF (SPY) breaking resistance and this area turning into support in November. The cup is half full (bullish) as long as SPY holds this breakout. The November low marks key support.
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Chart 1
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Chart 2
FINANCE SECTOR SHOWS RELATIVE WEAKNESS... The Finance SPDR (XLF) remains one of the weakest sectors in the market. The market as a whole has been under pressure the last six trading day (November 8 to 15). All sectors are lower over this timeframe and the Finance SPDR is down the most. The S&P Sector Perfchart shows the Finance SPDR leading the way lower with a 4.26% decline. In contrast, the Consumer Discretionary SPDR (XLY), Technology SPDR (XLK) and Industrials SPDR (XLI) show modest declines of less than 1%. These three are holding up quite well. Once again, the finance sector is the Achilles heel for the stock market.
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Chart 3
FINANCE SPDR TESTS SUPPORT... Chart 4 shows the Finance SPDR breaking above resistance in late October and then falling back in early November. The ETF broke a steep trendline extending up from the early October low with this decline. The rebound attempt above 13.50 failed to hold and the ETF is once again testing the early November lows. Overall, it looks like a descending triangle is taking shape the last 3-4 weeks. While this is traditionally a bearish continuation pattern, it has been known to mark a top or two. The lower high reflects a weak rally. The equal lows mark support or the last bastion of buying pressure. A break below support confirms the pattern. The height of the pattern (1.25) is subtracted from the support break (12.75) for a target (11.50). A break above resistance from last weeks high is needed to negate this pattern. The indicator window shows the Price Relative (XLF:SPY ratio). This indicator confirms what we are seeing on the PerfChart. XLF was showing some relative strength when the Price Relative broke out in late October, but could not maintain as the Price Relative sank the last three weeks.
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Chart 4
LIBOR MOVES SHARPLY HIGHER... Remember Libor? The acronym stands for the London Interbank Offered Rate, which is the interest rate banks charge other banks for loans. Pre-crisis (2007), one month Libor was hovering in the 5% area. The rate dropped dramatically with a move to 1% by the end of 2008. The decline continued into 2009 with a drop below .25%. Libor has since been fluctuating below .275% since October 2010. The absolute level is not that important because it is tied the general trend in interest rates. Big fluctuations, however, are important because they reflect the level of confidence or trust between banks. Rising Libor reflects a higher premium on lending to other banks (less confidence). This is clearly negative. Falling Libor indicates more confidence between banks and this is positive overall. Chart 5 shows Libor since 2009. The yellow areas show periods when Libor rose rather sharply. The rise in early 2009 coincided with a sharp decline in stocks. The sharp rise in March-April-May 2010 preceded and then coincided with the April high. Currently, Libor has been rising since late July. Again, this coincided with a sharp decline in the S&P 500 from late July to early August. The current concern, from a stock market perspective, is that Libor continues to rise and banks remain skeptical of each other. A sharp decline in Libor would indicate growing confidence and this would be bullish for the finance sector and stocks.
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Chart 5
US AND UK STOCKS OUTPERFORMING EUROPEAN STOCKS... Of all the players in Europe, Germany is perhaps the most important to the European economy and the Euro. German government bonds are viewed as the benchmark against which other European bond yields are compared. The stock market is usually holds up the best on the way down and outperforms on the way up. In fact, one could suggest that Europe may just muddle through the debt crisis as long as Germany holds up. The PerfChart below shows the performance of the S&P 500 and six other European indices over the last three months (65 trading days). The US and the UK are the only two gainers. Relative strength in the London FTSE 100 ($FTSE) can probably be attributed to the fact that the UK chose not to adopt the Euro. Of the major European indices, the German DAX Index ($DAX) and the Netherlands Index ($AEX) are holding up the best with the smallest losses. The French CAC Index ($CAC) shows the most weakness. The CAC is even down more than the Spanish Bolsa de Madrid IBEX 35 Index ($IBEX) and the Italian Milan Index ($MIB). This can be attributed to pervasive weakness in the big French banks. From this PerfChart, it is clear that German and Dutch stocks are holding up the best. As chartists, we should focus on these two for signs that troubles are spreading to the stronger countries of Europe, which would be negative for the US.
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Chart 6
GERMAN DAX HOLDS KEY SUPPORT LEVEL... Chart 7 shows the German DAX Index hitting resistance in a key retracement zone and forming a potential Head-and-Shoulders over the last two months. Working from left to right on the chart, notice that the index broke a major support level with the August plunge. The rally back to 6400 retraced 50-61.80% of the prior decline and returned to broken support. Technical analysis teaches us that broken support turns resistance. It is also common for corrective advances to retrace 50-61.80% of the prior decline.
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Chart 7
Even though this looks like a good area for a reversal and continuation of the bigger downtrend, keep in mind that the current trend since early October remains up. The DAX established support with lows in the 5700 area. In fact, it looks like a small Head-and-Shoulders is taking shape. A move below 5700 would confirm the pattern and reverse the October-November uptrend. Such a bearish development would be negative for the US. Chart 8 shows the Netherlands Index hitting resistance near the 50% retracement and declining with a falling wedge this month. Watch resistance from the early November high for a reversal of this falling wedge. Chart 9 shows the FTSE finding support from broken resistance in the 5400 area.
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Chart 8
