RUSSELL 2000 ETF TURNS BACK AT KEY RETRACEMENT -- S&P 500 ETF HITS RESISTANCE AT AUGUST SUPPORT BREAK -- XLK, XLY AND XLI HOLD OCTOBER BREAKOUTS -- RISING TREASURY PRICES ARE NEGATIVE FOR STOCKS
RUSSELL 2000 ETF TURNS BACK AT KEY RETRACEMENT... Link for todays video. If the stock market were to decline 20% over the next six months, chartists would no doubt be able to look back and identify the bearish signals that led to this decline. This is called hindsight. The key, as always, is identifying these signals before the actual move. This is called forecasting. What are the current signs that suggest the market could decline 20% in the next six months? Chart 1 shows the Russell 2000 ETF (IWM) with a number of bearish developments. First, the ETF broke support with a sharp decline in August and then exceeded the July 2009 trendline. Second, subsequent bounce met resistance near broken support and the 61.80% retracement. This is what would be expected from an oversold bounce or counter trend advance. Third, RSI broke below 40 for the first time since the rally began. The 50-60 zone now becomes resistance. Should IWM decline to the 58-60 area in the next six months, chartists would surely point to these three bearish chart features. Chart 2 shows the S&P 1500 ETF (ISI) with similar characteristics.
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Chart 1
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Chart 2
S&P 500 ETF HITS RESISTANCE AT AUGUST SUPPORT BREAK... Chart 3 shows the S&P 500 ETF (SPY) with a breakdown in August and big bounce in October. Even though this bounce exceeded broken support and the 61.80% retracement, the ETF is still having trouble in the 125 area. After surging above 125 in mid October, the ETF fell right back through the very next week and moved below 123 this week. Should SPY decline to the 2010 lows, which would be a 22% decline from the October high, chartists would no doubt point to the failure at 125. The Aroon oscillators also show a bearish bias right now. Aroon Down (Red) and Aroon Up (Green) crossed four times in the last three years. The most recent cross was bearish in late July. This signal has yet to be reversed. You can read more on Aroon in our ChartSchool Article.
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Chart 3
Before leaving this chart, I would like to point out the September 2010 breakout. Notice how SPY broke resistance and held the breakout without looking back. The ETF never broke back below 110. SPY forged a breakout in October with a move above 122 (blue line). This breakout is now under threat with this weeks decline. A move back below the breakout would show underlying weakness and further the bearish case. Should SPY advance 20% in the in the next six months, chartists would likely point to this October breakout and the fact that it held (if it does). My eyes are on this October breakout.
XLK, XLY AND XLI HOLD OCTOBER BREAKOUTS... The current trend and future outlook are often dependent on the time frame. There are roughly three timeframes for chart analysis: short, medium and long. While the exact definitions will vary, I would suggest that short covers one to four weeks, medium extends one to six months and long is anything over six months. In fact, six months is an eternity these days! The weekly charts above cover the long-term, while daily charts are good for the medium-term. Depending on the timeframe, there can be different trends at work at any given time. The long-term trend can be down and the medium-term trend can be up at the same time. Such a situation would suggest that the medium-term uptrend as a counter trend rally within the bigger downtrend. This could be the case right now. In Thursdays Market Message, John Murphy pointed out some long-term indicators that were still bearish. This jibes with the weekly chart analysis shown above. Despite the long-term negatives, the medium-term uptrends have yet to actually reverse. In particular, the October breakouts have yet to fail. But they are getting dangerously close.
The next three charts cover the consumer discretionary, industrials and technology sectors. The Finance SPDR (XLF) already broke support and these three are testing support zones. Support breaks by three of the four would be bearish for the market overall. Chart 4 shows the Consumer Discretionary SPDR (XLY) breaking resistance in the 37.5-38 area and this area turning support since late October. The ETF is testing this zone after this weeks sharp decline. A break below this support zone would negate the October breakout. The indicator window shows the Price Relative testing the trendline extending up from mid June. A break below would indicate that the consumer discretionary sector is showing relative weakness. As the most economically sensitive sector, a shift from relative strength to relative weakness would be quite negative for the overall market. Chart 5 shows the Industrials SPDR (XLI) testing support in the 32-33 area. Chart 6 shows the Technology SPDR (XLK) testing its support zone as well.
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Chart 4
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Chart 5
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Chart 6
RISING TREASURY PRICES ARE NEGATIVE FOR STOCKS... Chart 7 shows the 20+ year Bond ETF (TLT) surging above its 2010 and 2009 highs with a big move this summer. The ETF pulled back as the stock market bounced in October, but found support near 100 and surged the last three weeks. The trend in Treasuries is clearly up and this is negative for stocks. Strength in Treasuries reflects a flight to safety (risk-off) or a deteriorating outlook for the economy, or both. Turning back to the price chart, the October low becomes key support and it would take a move below this level to reverse the 2011 uptrend. The indicator window shows the Correlation Coefficient. While there were periods of positive correlation, the indicator spent most of the last four years in negative territory. This means Treasuries and stocks tend to move in opposite directions. Chart 8 shows a daily chart with a falling wedge breakout in early November. This breakout is holding as the ETF established medium-term support at 115. Notice that the 20-day Correlation Coefficient has been negative for six months. Chart 9 shows the 10-year Treasury Yield ($TNX) for reference.
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Chart 7
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Chart 8
