S&P 500 ETF CHALLENGES 2011 HIGHS -- NASDAQ 100 ETF HOLDS NECKLINE BREAKOUT -- TREASURY YIELDS SURGE ON STRONG EMPLOYMENT REPORT -- 7-10 YEAR T-BOND ETF FORMS BEARISH THRUST
S&P 500 ETF CHALLENGES 2011 HIGHS... Link for todays video. A string of positive economic-related reports lifted stocks on Friday and the S&P 500 ETF (SPY) is poised to close higher for the fifth consecutive week. Factory Orders expanded at a healthy clip, IWM Services expanded and the employment rate came down. These positive reports should not come as a surprise because stocks, which are a leading indicator, are up sharply since early October. Chart 1 shows SPY challenging its 2011 highs around 135 with todays move. This level marked resistance from April to July and the ETF declined rather sharply in late July and early August. SPY is once again at resistance and overbought after a sharp advance the last four months. The ETF is up over 25% from its early October low and up over 15% from its late November low. At the risk of over speculating, resistance and these overbought conditions could give way to a corrective period in the coming weeks. Should a sideways consolidation between 125 and 135 develop, we could see an inverse head-and-shoulders patterns evolve. Notice that the June lows marks potential support for the right shoulder around 125.
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Chart 1
Chart 2 shows the Russell 2000 ETF (IWM) surging over 3% this week with a move above 82. While DIA and QQQ are above their 2011 highs and SPY is near its 2011 highs, IWM has yet to reach these highs and may have further room to run before moving into corrective mode.
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Chart 2
NASDAQ 100 ETF HOLDS NECKLINE BREAKOUT... Chart 3 shows the Nasdaq 100 ETF (QQQ) breaking above its 2011 highs three weeks ago and holding this breakout. Thanks, Apple! Overall, the pattern at work is an inverse head-and-shoulders and the neckline breakout signals a continuation of the big uptrend. Perhaps this is the famous fifth wave (see pink zigzag). Incidentally, this inverse head-and-shoulders pattern was first pointed out in the December 7th Market Message.
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Chart 3
TREASURY YIELDS SURGE ON STRONG EMPLOYMENT REPORT... The Labor Department reported that non-farm payrolls increased by 243,000 and the employment rate fell to 8.3%, which is its lowest level since February 2009. Todays surge in non-farm payrolls simply adds to a string of monthly gains and maintains the uptrend in job growth. Such news also questions whether Fed can refrain from raising interest rates until late 2014. Whatever the case, we can expect treasury bonds to move well before the Fed changes its policies. Chart 4 shows the 10-year Treasury Yield ($TNX) surging off 18 (1.8%) with a big move on Friday. I featured the 10-year Treasury Yield two weeks ago as it surged above the falling wedge trendline. This breakout did not hold, but $TNX did ultimately hold above the September low and find support near the late December low. Perhaps last weeks plunge below 19 (1.9%) was a case of irrational exuberance. The highs from late December and January mark resistance in the 20-21 area. A break above these levels would be bullish for yields and bearish for treasuries. Yields and stocks have been positively correlated for most of the last 12 months. I noted on Wednesday that this positive correlation was getting a challenge. Lets see if stocks follow yields higher today to keep this positive correlation alive.
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Chart 4
Chart 5 shows the 3-month T-Bill Yield ($IRX) surging throughout January. Notice that this surge is occurring even as the Fed jawbones about a zero interest rate policy. The 3-month T-Bill Yield was below .3 (.03%) from early August to mid January, which is next to nothing. Treasury Bill buyers were in risk-off mode because they wanted a return off their investment, not a return on their investment. While this surge above .3 shows a move from the ultimate safe haven, note that the 3-month T-Bill Yield is still very low by historical standards. It is not even close to 1%, which would be 10 on this chart.
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Chart 5
7-10 YEAR T-BOND ETF FORMS BEARISH THRUST ... The Wyckoff thrust is a bearish pattern based on a failed resistance break. Earlier this week I reported that the 7-10 year T-Bond ETF (IEF) moved above its 2011 highs and broke resistance. However, there was no follow through to this breakout and the ETF moved back below the breakout with a sharp move lower today. The pattern at work here is a Wyckoff thrust, which is potentially bearish. Richard D. Wyckoff, a legendary trader and analyst, was a pioneer of technical analysis and active from 1900 to 1930, a time many refer to as the golden age of technical analysis. This failed breakout is the first sign of trouble for treasuries. Despite this failure, the overall uptrend has yet to fully reverse. Chart 6 shows the late December and January lows marking first support for IEF, while the early December low mark second support. We need to see some downside follow through to confirm a trend reversal.
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Chart 6
In contrast to IEF above, the 20+ Year T-Bond ETF (TLT) never even challenged its 2011 highs and formed lower highs the last seven weeks. Chart 7 shows TLT establishing resistance with highs in early October and mid December. The January and (now) February highs are lower. Longer term treasuries are more sensitive to interest rates changes than shorter term treasuries because of the longer payback period. In essence we are seeing relative weakness in the 20+ Year T-Bond ETF because it is more vulnerable to change in interest rates. Relative weakness in long-term treasuries could foreshadow a trend reversal in bond market. Strength in the economy, improving employment and a robust stock market are negative for treasuries. At this point, a break above the late January high is needed to reverse the seven week slide. Barring such a breakout, TLT could be heading for a test of the October low. Chart 8 shows the 30-year Treasury Yield ($TYX) forming a higher low in December, breaking out in January and moving back above 31 (3.1%) today.
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Chart 7
