IWM GETS CAUGHT IN MOVING AVERAGE SANDWICH -- SPY FAILS AT 200-DAY SMA -- RYDEX S&P EQUAL WEIGHT ETF UNDERPERFORMS SPY -- EURO PLUNGES AS MARKETS RE-ASSESS EU SUMMIT -- ENERGY SPDR LEADS SECTORS LOWER
IWM GETS CAUGHT IN MOVING AVERAGE SANDWICH ... Link for todays video. Stocks were down sharply in early trading on Monday with small-caps leading the way lower. With this move, the 200-day moving average is marking resistance for the Russell 2000 ETF (IWM). Despite todays decline, the 50-day line is still holding and the moving average sandwich remains alive. Chart 1 shows IWM forming two doji last week and a potential Harami over the last two days. Doji signal indecision and the Harami is a bearish candlestick reversal pattern. Fridays long white candlestick and todays smaller black candlestick, which is inside the first, form the Harami. This candlestick pair also denotes indecision and the Harami is valid as long as todays close is above Fridays open. As with Friday, I am watching these two moving averages for the next directional signal. A break above the 200-day unleashes the bulls, while a break below the 50-day would be bearish. There is even a pennant coming into play over the last two weeks (pink lines). After a big surge above 72, price action contracted over the last two weeks. Watch the pennant boundaries for an even earlier signal. Be careful though. Trading could remain volatile because Retail Sales will be reported on Tuesday morning and the Fed makes its policy state on Wednesday afternoon.
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Chart 1
SPY FAILS AT 200-DAY SMA... John Murphy showed the S&P 500 failing at its 200-day SMA last week and this theme continues this week. Chart 2 shows the S&P 500 ETF (SPY) failing to hold above the 200-day simple moving average with a move lower on Monday. It is also possible that lower highs are forming from July to October-November. Failure at the 200-day is negative and the 50-day SMA holds the next key. A break below the 50-day would be bearish. I am also watching StochRSI for a momentum signal. This hyperactive oscillator fluctuates between zero and one. Surges above .80 are deemed bullish, while plunges below .20 are deemed bearish. Not every signal works, but this momentum tool can be used in conjunction with other analysis techniques.
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Chart 2
RYDEX S&P EQUAL WEIGHT ETF UNDERPERFORMS SPY ... Comparing the performance of the Rydex S&P Equal Weight ETF (RSP) and the S&P 500 ETF (SPY) is a good way to gauge small-mid cap performance. There are 500 stocks in the S&P 500 and only 100 are large. Each stock carries equal weight in the Rydex S&P Equal Weight ETF. SPY, on the other hand, is weighed by market capitalization. This means the top ten holdings account for around 20% of the ETF. These holdings are listed on the prior chart. Note that there are no banks in the top ten! In contrast to SPY, the top ten holdings in RSP account for less than 3% of the ETF. See chart 3 for the list. Even though Lennar (LEN) is the biggest holding (.28%) it is not big enough to seriously sway the ETF. Chart 3 shows RSP failing at a classic resistance levels. The October surge, though sharp, failed at the 200-day SMA and at broken support. If the October surge was indeed a bear market rally, then this means a continuation of the bigger downtrend could be starting. It would take a break above 47.50 to question this theory.
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Chart 3
The indicator window shows the RSP:SPY ratio. Notice how the ratio formed a lower high and moved lower from July to September. RSP underperformed SPY during this period and the broader market was weak. RSP outperformed in October and the broader market was strong. This ratio peaked in early November and declined the last six weeks. Once again, RSP is underperforming and this is negative for the broader market.
EURO PLUNGES AS MARKETS RE-ASSESS EU SUMMIT... The Euro moved sharply lower on Monday as bond yields in Europe moved higher. The Italian 10 year yield moved back to the 7% area, while the Spanish 10 year yield was near 6%. In comparison, the US and German 10 year bonds yield around 2%. Investors are charging a much larger premium to buy Italian and Spanish paper. There was more fear in the European debt markets on Monday, than last week.
Chart 4 shows the Euro Currency Trust (FXE) continuing a slide that started at the end of October. With a move below 132, FXE is testing support from the early October low. Key resistance is set at 134.60 and it would take a break above this level to reverse the downtrend. Weakness in the Euro is again weighing on stocks today. If you recall, the Euro bottomed in early October and surged above 140 a few weeks later. This move to risk-on prompted a sharp rally in the stock market, which ended when the Euro fell right back to its October lows in late November. This positive correlation is confirmed by the $SPX/FXE Correlation Coefficient, which has been trading above zero for most of the last six months.
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Chart 4
Chart 5 shows weekly candlesticks for the Euro Currency Trust. FXE broke support with a sharp decline in early September, hit resistance at the trendline extension on the throwback and then continued lower the last 6-7 weeks. The 61.80% retracement and prior lows mark the next support zone around 128-130. The indicator window shows StochRSI. A surge above .60 is considered bullish for momentum, while a plunge below .40 is considered bearish. This system is not without whipsaws, but it did turn bearish the first week of November and remains bearish.
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Chart 5
Unsurprisingly, the US Dollar Fund (UUP) is surging on Monday. Chart 6 shows daily candlesticks with a surge above 22.30 in early trading. This move reinforces support from the early December low. Chart 7 shows weekly candlesticks with a target in the 23.25-23.50 area. This target stems from the 61.80% retracement and the prior reaction highs. RSI broke resistance in early September and held the 40 level during the October pullback. Momentum should be considered bullish as long as RSI holds above 40.
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Chart 6
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Chart 7
ENERGY SPDR LEADS SECTORS LOWER... Both oil and stocks moved sharply lower on Monday, which was a double negative for energy stocks. In this case, a double negative does not equal a positive. Chart 8 shows the Energy SPDR (XLE) hitting stiff resistance in the 72 area and moving below 68 today. This move is filling the November 30th gap. Overall, this chart has characteristics similar to those seen in the Rydex S&P Equal Weight ETF chart. Broken resistance turned into support. Lower highs are forming from July to October-November. The decline over the last six days reinforces resistance at 72. A break above this level is needed for a reassessment. The indicator window shows the Price Relative also forming lower highs from July to November-December. XLE is showing relative weakness.
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Chart 8
Chart 9 shows the Oil Service HOLDRS (OIH) hitting resistance in the 135 are and then forming a lower high at 130 this month. The bears are out in force now with 130 as the first level to beat. The indicator window shows OIH relative to Spot Light Crude ($WTIC). OIH has been underperforming oil since early August. Relative weakness in oil services is not a good sign of oil prices. Note that Merrill Lynch is discontinuing the HOLDRS at yearend, but Van Eck Global (vaneck.com) will takeover six of the most popular HOLDRS (OIH, SMH, PPH, BBH, RTH and RKH).
