QQQ CONTINUES TO SHOW RELATIVE WEAKNESS -- INTERNET, SEMICONDUCTOR AND NETWORKING ETFS MOVE LOWER -- SPY GOES NOWHERE AS TRIANGLE TAKES SHAPE -- BASE METALS ETF BREAKS TRIANGLE SUPPORT -- COPPER TESTS TRIANGLE SUPPORT
QQQ CONTINUES TO SHOW RELATIVE WEAKNESS... Link for todays video. An earnings miss from Oracle hit the stock and the technology sector hard on Wednesday. With a market cap of $127 billion, Oracle (ORCL) is still a technology titan that carries lots of weight within the industry. Chart 1 shows the tech-laden Nasdaq 100 ETF (QQQ) giving up most of Tuesdays gains with a plunge below 55 on Wednesday. Overall, the ETF formed a lower high from July to October and again from early November to early December. Also note that the December decline filled the November 30th gap. At the very least, a move above the trendline extending down from early November is needed to revive the bulls.
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Chart 1
QQQ has been underperforming the S&P 500 ETF (SPY) since mid October. The indicator window shows the Price Relative, which is the QQQ:SPY ratio. This ratio rises when QQQ outperforms SPY and falls when QQQ underperforms. The Price Relative is currently in a clear downtrend as QQQ continues to show relative weakness. This is not a good sign for the technology sector. Chart 2 shows Oracle (ORCL) gapping down and testing its August low.
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Chart 2
SEMICONDUCTOR, INTERNET AND NETWORKING ETFS ALSO HIT HARD... Weakness in the technology sector was not confined to software stocks like Oracle. Of the 100 stocks in the Nasdaq 100, around 85 were down in afternoon trading on Wednesday. Chart 3 shows the Semiconductor HOLDRS (SMH) giving back most of Tuesdays gains. Overall the stock formed a triangle the last five weeks. A move below the mid December lows would break triangle support, while a move above Tuesdays high would break triangle resistance. Continued weakness in the Price Relative suggests that the break will be to the downside. Notice that the SMH:SPY ratio peaked in mid November and moved steadily lower throughout December.
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Chart 3
Chart 4 shows the FirstTrust Internet ETF (FDN) falling over 2% on Wednesday. After a big surge in October, the ETF plunged in late November and then formed a lower high in early December. There is support at 31 from the early October trendline and last weeks low. A break below this support level would be bearish. The indicator window shows the Price Relative breaking to a new low. Relative to the broader market (SPY), FDN shows some serious relative weakness and underperformance.
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Chart 4
Chart 5 shows the Networking iShares (IGN) failing to hold the Double Bottom breakout in late October and zigzagging lower since mid November. A falling wedge is taking shape, but the trend is clearly down as long as the wedge falls. A move above 28 is needed to break wedge resistance. The indicator window shows the Price Relative (IGN:SPY ratio) hitting a new low over the last few days. Add IGN to the list of technology ETFs showing relative weakness.
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Chart 5
SPY GOES NOWHERE AS TRIANGLE TAKES SHAPE... The S&P 500 ETF (SPY) started the year at 124.11, which was in the middle of an uptrend that began in the summer of 2010. The ETF hit 135 on the high side and dipped below 107.50 on the low end. Despite all this pushing and shoving, the ETF is pretty much unchanged since January 3rd, 2011. Chart 6 shows weekly candlesticks over the last three years. SPY was trading near its 2011 highs in late July and near its 2011 lows in early August, just a few weeks later. Price action has narrowed over the last few months with a triangle of sorts taking shape. The upper trendline and early December high mark resistance at 127, while the lower trendline and November low mark support at 115.
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Chart 6
Momentum shows signs of life with the late November surge. The first indicator window shows the Aroon Oscillators set for 18 periods (weeks). This is just over four months. Momentum turns bullish when Aroon Up (green) crosses above Aroon Down (red) and bearish otherwise. Notice that Aroon Up recently crossed above Aroon Down. The bullish cross negates the bearish cross from late July. The lower indicator window shows the TRIX oscillator holding above its signal line and moving into positive territory. Despite these improvements to momentum, SPY still needs to move above 127 to break an important resistance level on the price chart. You can read about the Aroon Oscillators and the TRIX Oscillator in our ChartSchool.
BASE METALS ETF BREAKS TRIANGLE SUPPORT... Demand for base metals ebbs and flows along with fluctuations in the overall economy. Changes in demand affect base metal prices. Weakening demand weighs on prices, while strengthening demand pushes prices higher. With this in mind chartists can get an idea of economic conditions by watching base metal prices. Chart 7 shows weekly candlesticks for the Base Metals ETF (DBB) over the last three years. The ETF broke a major support level in August and fell below 19 in September. After a period of consolidation, the ETF broke triangle support with a decline last week to signal a continuation of the bigger downtrend. There was a bounce back this week, but it was not enough to negate the triangle support break. The 2010 lows and 61.80% retracement mark next support in the 17 area. The indicator window shows the 18-period Aroon Oscillators. These two have been bearish since Aroon Down crossed above Aroon Up in late April, almost eight months ago.
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Chart 7
COPPER TESTS TRIANGLE SUPPORT... Chart 8 shows Spot Copper ($COPPER) breaking down in September and then forming a triangle the last few months. Even though copper rebounded with the equity markets in October, the support break held as the October high failed to exceed 3.75. The triangle is typically a continuation pattern, which means a break below triangle support would signal a continuation of the September decline. The yellow area marks the next support zone around 2.3-2.75. On the upside, a break above the late November high would be bullish. Chartists should pay attention to copper because it is probably the most important industrial metal. In fact, it has the nickname Dr. Copper, implying that copper has a PhD in economics. Also note that the 26-week Correlation Coefficient for the S&P 500 and copper has been positive for most of the last three years. 26-weeks covers half a year for a long-term perspective. With stocks and copper moving in the same direction, chartists should keep an eye on Dr. Copper while drinking a Dr. Pepper.
