QQQ FILLS GAP AS IWM BREAKS 50-DAY SMA -- TWO OF FOUR OFFENSIVE SECTORS SHOW RELATIVE WEAKNESS -- XLY AND XLK FAIL AT RESISTANCE LEVELS -- GOLD BREAKS LONG-TERM TRENDLINE
QQQ FILLS GAP AS IWM BREAKS 50-DAY SMA... Link for todays video. The Nasdaq 100 ETF (QQQ) led the major index ETFs lower on Wednesday and filled the big gap. Chart 1 shows QQQ forming lower highs from July to October and from early November to early December. With a sharp decline this month, the ETF filled the island reversal gap to negate this reversal. A bullish reversal pattern is valid as long as it holds. The island reversal was impressive, but it was not impressive enough to hold. With these lower highs and filled gap, the outlook turns bearish on the daily chart. The late November low marks first support around 53 and the summer lows mark next support around 50. The indicator window shows the Price Relative moving lower since mid October. This means QQQ has been underperforming SPY for two months.
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Chart 1
I showed a chart of the Russell 2000 ETF (IWM) in a moving average sandwich on Monday. At the time, IWM was caught between the 200-day above and the 50-day below. With the sharp decline the last two days, IWM made a statement by breaking the 50-day. This means resistance from the 200-day held. Also notice that lower highs took shape from July to late October and from late October to December. Buying pressure just aint as strong as it used to be.
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Chart 2
TWO OF FOUR OFFENSIVE SECTORS SHOW RELATIVE WEAKNESS... The Consumer Discretionary SPDR (XLY) and the Technology SPDR (XLK) represent two of the four offensive sectors. Finance and industrials are the other two. The consumer discretionary sector is the most economically sensitive sector (think consumer spending). The technology sector represents growth and the appetite for risk. The industrials sector produces the capital goods for manufacturing, transport and infrastructure. The finance sector represents the banks, both regional and money center. It is easy to understand why these sectors are important to the market overall. Of these four sectors, I think consumer discretionary and technology are the most important. Upside leadership from these two is a big positive for the stock market. Relative weakness from these two is a big negative.
PerfChart 3 shows the relative performance for the nine sector SPDRs over the past week (six days). Relative performance equals the percentage gain/loss in the sector less then percentage gain/loss in the S&P 500. Sectors with positive relative performance are up more or down less than the S&P 500, while sectors with negative relative performance are up less or down more than the benchmark index. If the S&P 500 is up 2% and the Consumer Discretionary SPDR is up 3%, then relative performance would be +1% (3 2 = 1). The slider at the bottom of each Perfchart can be used to quickly change the timeframe (past week, month, three months, six months or year). Simply go to the slider and click the right mouse button for a menu.
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Chart 3
PerfChart 3 (above) shows the consumer discretionary and technology sectors outperforming over the past week. The industrials and finance sectors have been underperforming. Relative weakness in two cancels out relative strength in the other two. Also note that the consumer staples, utilities and healthcare sectors are showing relative strength. These are the three defensive sectors. The combination of relative weakness in two key offensive sectors and relative strength in the three defensive sectors paints a negative (risk-off) picture for the broader market. This picture is similar when we look at performance over the past month (PerfChart 4). The picture is mixed on other timeframes.
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Chart 4
XLY AND XLK FAIL AT RESISTANCE LEVELS... With sharp declines over the last 8 days, the Consumer Discretionary SPDR (XLY) and the Technology SPDR (XLK) failed at important resistance levels. Chart 5 shows XLY hitting resistance just below the October high and moving lower this month. Lower highs are taking shape from July to October (blue arrows) and now from October to December (red arrows). These lower highs show buying pressure fading at lower prices. In other words, buying pressure was not as strong. The indicator window shows the Price Relative, which compares the performance of XLY to the S&P 500 ETF (SPY). XLY has been outperforming since February, but the Price Relative may be forming a lower high in December. A break below support would show relative weakness and this would be most negative for the broader market.
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Chart 5
Chart 6 shows the Technology SPDR (XLK) with lower highs from July to October and early November to early December. With the sharp decline the last two days, XLK entered the gap zone from November 30th. Filling this gap would be quite negative. The Price Relative (XLK:SPY) ratio peaked in mid October and moved lower the last two months. Even though it has flattened somewhat, we have yet to see a breakout to indicate relative strength from the technology sector.
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Chart 6
GOLD BREAKS LONG-TERM CHANNEL TRENDLINE... Chart 7 shows Spot Gold ($GOLD) with a rising price channel that extends back to 2009. Spot gold closed around $1586 today, which means the yellow metal broke this channel trendline (black arrow). Not so fast there cowboy! This is a weekly chart and there are still two days remaining, which means gold could rebound and close above the trendline. Also notice that RSI is trading back in the support zone that held throughout the uptrend. This is a major test for gold.
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Chart 7
Chart 8 shows daily closing prices for Spot Gold $GOLD). For potential support levels, note that a 61.80% retracement of the January-August surge would extend to the 1550 area. Also notice that broken resistance turns into support in this area. It is also possible that a falling channel is taking shape. A decline to the lower channel line would extend to the 1500 area by yearend. RSI, which is in the indicator window, will probably become oversold after todays plunge. 14-day RSI has not been oversold since October 2008!
