SEPARATING PRIMARY FROM SECONDARY MOVEMENTS -- S&P 1500 ETF HAS TROUBLE HOLDING THE BREAKOUT -- RETAIL SPDR STILL TRADING NEAR SUMMER HIGHS -- BROKEN SUPPORT TURNS RESISTANCE FOR TRANSPORT ISHARES -- LONG-TERM TREASURY YIELDS CONTINUE TO FALL
SEPARATING PRIMARY MOVEMENTS FROM SECONDARY MOVEMENTS... Link for todays video. Today I am going to focus on weekly charts for a long-term perspective. Charles Dow identified three general movements in the market: primary, secondary and random fluctuations. The primary trend is, of course, the biggest and the most important. Secondary trends run counter to the primary trend. These are pullbacks within a bigger uptrend or bounces within a bigger downtrend. Fluctuations are noisy and smaller price movements that have much less importance. Chart 1 shows a basic version of this concept. The red lines represent primary movements (declines) in a bigger downtrend. The black lines represent secondary movements against the bigger trend. The green lines represent primary movements (advances) in a bigger uptrend.
Chart 1
Now if we can just distinguish between primary and secondary movements on a real chart! Lets try. Chart 2 shows the S&P 500 with two possibilities. It all boils down to ones interpretation of the July-September decline. Was it a primary or secondary? If this decline was a secondary move (correction), then a new primary advance started in October and a move to new highs is expected (green lines). If, however, the July-August decline broke the bulls back to start a primary downtrend, then the October surge was a secondary move or bounce within a bigger downtrend. We need to apply some other charting techniques to better define these moves.
(click to view a live version of this chart)
Chart 2
S&P 1500 ETF HAS TROUBLE HOLDING THE BREAKOUT... Chart 1 shows the S&P 1500 ETF (ISI) over the last three years with chart space extending to the end of April 2012. The blue arrows mark two sizable declines in the last three years. The black arrows mark successful support tests that led to breakouts. The 2010 breakout was clean as the index never looked back and continued to new highs. There were no questions regarding strength here. In contrast to 2010, the October 2011 breakout is a mess. ISI successfully tested the August 2011 low and surged above resistance at 55 in October. Even though this surge and breakout looked strong, the ETF has since had all kinds of trouble getting back through the 57.5 level, which marks broken support. Notice that a top formed from February to July and there is a clear support break here in August. Broken support turns into resistance, which is a basic tenet of technical analysis. A failure at broken support and continuation lower would be textbook price action. The pink channel marks a downside target around 45 in April 2012. This area also marks a 50% retracement of the entire advance.
(click to view a live version of this chart)
Chart 3
The indicator window shows 14-period RSI. Notice that RSI broke above 60 in July 2009 to turn momentum bullish. Once bullish, RSI oscillated between 40 and 80 during the bull run. Andrew Cardwell, a noted RSI expert, teaches that RSI oscillates in bull zones and bear zones. A bull zone extends from 40 to 80, while a bear zone extends from 20 to 60. Notice that RSI broke below 40 with the summer breakdown and is now hitting resistance in the 50-60 zone. This puts RSI in a bear zone. The bulk of the chart evidence suggests that the July-September decline was a primary move, which makes the October advance a secondary move or correction within a bigger downtrend. Evidence includes the top formation, August support break, broken support turning resistance and the RSI range. A break above channel resistance would invalidate this hypothesis. Chart 3 shows the S&P MidCap 400 SPDR (MDY) with similar characteristics.
(click to view a live version of this chart)
Chart 4
RETAIL SPDR STILL TRADING NEAR SUMMER HIGHS... The Retail SPDR (XRT) remains one of the strongest ETFs in the market. As a core part of the consumer discretionary sector, retail is one of the most important industry groups and Christmas is perhaps the most important for revenues. A lot is rising on holiday shopping. Chart 4 shows XRT bouncing off support in the 42.5 area and working its way back above 50. A rising channel has taken shape with support marked at 47.50. A move below this level would break channel support and argue for a continuation of the summer decline. It has not happened yet though. The broader market has a bullish chance as long as retail holds up.
(click to view a live version of this chart)
Chart 5
The indicator window shows RSI over the last three years. 14-period RSI broke above 60 in April 2009 and held its bull zone for just over two years. RSI broke below 40 in August and is currently in the 50-60 resistance zone. This is a big test for momentum. A break above 60 puts the bulls back in the drivers seat, while a break back below 45 would be bearish.
BROKEN SUPPORT TURNS RESISTANCE FOR TRANSPORT ISHARES... Transport and retail go together like peas and carrots, especially with the growth in online shopping. Somebody has to make all those deliveries (FedEx, UPS, JBHT). Chart 5 shows the Transport iShares (IYT) hitting resistance near broken support (90) and RSI in the resistance zone. As with the Retail SPDR, the Transport iShares is at a moment-of-truth.
(click to view a live version of this chart)
Chart 6
LONG-TERM TREASURY YIELDS CONTINUE TO FALL... The long-term downtrend and excessive low levels in the 10-year Treasury Yield ($TNX) is negative for stocks. A guest on CNBC noted that strength in US Treasuries was a flight to safety, not a flight to quality. This is also true with the Dollar. Investors are not buying Treasuries and the Dollar because for quality. Investors are interested in these two because of their relatively safety. A popular description suggests that this is a beauty contest where all the contestants are ugly. Investors are simply choosing the least ugly contestant. A sustainable uptrend in stocks is unlikely as long as the 10-year Treasury Yield ($TNX) remains in its downtrend, which means US Treasuries remain in an uptrend. Remember, bonds and interest rates move in opposite directions. Chart 6 shows the 10-year Treasury Yield breaking its 2010 low in early August and then its 2008 low in September. There was a bounce back above 2% in early October, but the yield is once again back below 2%, as is the yield on the German Bund, which is the European flight to safety bond. Key resistance is set at 24 (2.4%). A break above this level would suggest a major bullish reversal in long-term rates. Such a breakout would be bearish for US Treasuries and bullish for US stocks. It aint happened yet though. Chart 7 shows the 7-10 year Bond ETF (IEF) for reference.
(click to view a live version of this chart)
Chart 7
(click to view a live version of this chart)
Chart 8
T-BILL YIELD FLIRTS WITH ZERO PERCENT... The flight to safety can also be seen in the 3-month T-Bill Yield ($IRX), which is near zero percent. Yes, investors are buying 3-month paper just to park their money. No interest is required. Investor are more interested in the return of their capital than the return on their capital. The Fed has had its zero interest rate policy since the last cut in the Fed Funds rate, which was December 2008 when the Fed cut its Fed Funds target range from .75-1% to 0-.25%. This zero percent interest rate policy has been in effect for three years. Even so, the 3-month T-Bill Yield bounced in early 2009 and early 2010. Most recently, the yield declined below .25% and remains near zero. A breakout above 1% is needed to show some confidence in the financial markets. This would imply selling in 13-week Treasury Bills, which would in turn free up some money for other markets.
