WEEKLY MOMENTUM REMAINS BULLISH FOR SPY -- DOW TRANSPORTS HAVE YET TO CONFIRM DOW INDUSTRIALS -- BROKEN RESISTANCE TURNS FIRST SUPPORT FOR DOW TRANSPORTS -- SUGAR BREAKS WEDGE RESISTANCE WITH STRONG MOVE -- BOLLINGER BANDS CONTRACT FOR AGRICULTURE ETF
WEEKLY MOMENTUM REMAINS BULLISH FOR SPY... Link for todays video. Upside momentum may not be as strong as it was in February 2011, but momentum is clearly bullish and moving in the right direction. Earlier this week I showed the Average Directional Index (ADX) moving to an extreme (above 40) and small-caps starting to lag the broader market. Everybody and their dog think the market is overbought and ripe for a correction, including yours truly and his dog. Even so, also keep in mind that markets can become overbought and remain overbought. The warning signs can persist even as the market continues to rise. For actual signs of weakness, chartists should consider watching weekly MACD and its signal line, which is the 9-period EMA of MACD. MACD is the difference between two moving averages, usually the 12-period EMA less the 26-period EMA. Moving averages give MACD some trend following characteristics. Taking the difference of two moving averages gives MACD some momentum characteristics. It is a true hybrid indicator that has stood the test of time.
Chart 1 shows the S&P 500 ETF (SPY) moving above its 2011 high and weekly MACD trading well below its 2011 high. Technically, a big bearish divergence may be brewing. In reality, this is a non-event as long as MACD remains above its signal line. The bearish divergence is a possibility that has not yet materialized. Notice that MACD also had a possible bearish divergence in December 2010 when SPY broke its prior high and MACD was still below this high. The bearish divergence never materialized as MACD continued higher for another three months and did not break its signal line until March 2011.
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Chart 1
Bullish momentum is the current reality because MACD is in positive territory and above its signal line, which means it is rising. At the very least, a move below the signal line is needed to signal a downturn in momentum. The current uptrend, therefore, looks set to continue until MACD moves below its signal line. The blue dashed lines show the last three bearish signal line crosses since March 2009. Notice that a bearish divergence in the MACD-Histogram preceded two of the three. As the chart now stands, we have yet to see a deterioration or divergence in the MACD-Histogram. Note that the MACD-Histogram measures the difference between MACD and its signal line. You can read more on MACD in our ChartSchool.
DOW TRANSPORTS HAVE YET TO CONFIRM DOW INDUSTRIALS ... The Dow Industrials moved above its 2011 high and exceeded 13000 this week, which marks its highest level since 2008. Chart 2 shows the Dow Transports failing to clear its 2011 highs and falling back over the last three weeks. Greg Schnell, who writes The Canadian Technician blog on our site, highlighted this brewing non-confirmation two weeks ago (hat tip). At the time, I was not too concerned because both the Dow Industrials and Dow Transports were showing strength. With the Dow Transports set to close lower for the third week in a row, we should keep an eye on this non-confirmation. Keep in mind that a non-confirmation is not a Dow Theory sell signal and it is not enough to negate a Dow Theory buy signal, which has been in force since both broke their late August highs. It simply means that a new high/low in one Average was not confirmed the other. Both would have to break below their October lows to produce a Dow Theory sell signal.
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Chart 2
The indicator window shows the weekly Percent Price Oscillator (PPO), which is a percentage version of MACD. First, notice that the PPO declined from January to June 2011 and the Dow Transports continued higher. This means the Transports simply continued higher at a slower pace than before. There was not any real downside momentum until the PPO turned negative, which occurred in early August. The PPO moved back above its signal line in mid October and back into positive territory in mid December. Even though a Dow Theory non-confirmation is lurking, there are no signs of weakness in momentum yet. A move below the signal line would be the first potential negative and a move below the zero line would be outright bearish. Chart 3 shows the Dow Industrials edging above its 2011 highs and weekly PPO remaining above its signal line.
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Chart 3
BROKEN RESISTANCE TURNS FIRST SUPPORT FOR DOW TRANSPORTS ... Chart 4 shows daily bars for the Dow Transports over the past year. Broken support turned into resistance around 5000 and then back to support. This is the first area to watch for a bounce. The indicator window shows the Dow Transports relative to the Dow Industrials ($TRAN:$INDU). Notice that the Dow Transports outperformed the Dow Industrials from October to January, but is now underperforming in February. The Price Relative broke below the October trendline and exceeded the December low. Relative weakness in the economically sensitive Dow Transports is not a good sign. Even so, this is just another warning sign, not an actual bearish signal. We have yet to see weekly PPO move below its signal line or the Dow Transports break below 5000. Such moves would be more concrete signs of weakness.
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Chart 4
SUGAR BREAKS WEDGE RESISTANCE WITH STRONG MOVE... Commodities have been making a move the last few weeks with metals and energy leading the charge. Some of the soft commodities are also starting to perk up. Chart 5 shows the Sugar ETN (SGG) breaking wedge resistance with a strong move over the last few weeks. After a strong surge from May to July, the ETN retraced 61.80% with a falling wedge. Both the pattern and the retracement amount are typical for corrections within bigger uptrends. This weeks break above the January high reverses the wedges fall and starts a new uptrend. I am setting key support at 82.40 for now. The indicator window shows RSI moving above 70 for the first time since July. While this suggests sugar is short-term overbought, the move above 70 reflects momentum upthrust that confirms the breakout. Notice that RSI surged above 70in mid June and the rally continued into July.
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Chart 5
BOLLINGER BANDS CONTRACT FOR AGRICULTURE ETF ... Chart 6 shows the Agriculture ETF (DBA) with the Bollinger Bands at their narrowest in over six months. The indicator window shows bandwidth, moving below 1 for the fifth time in twelve months. On the price chart, the Bollinger Bands are set with the area style to enhance their showing on the chart. DBA has been trading flat since mid January and this may be the calm before the storm (break). Narrowing bands do not give us directional clues. They simply tell us that volatility is contracting and this contraction could foreshadow a volatility expansion, which is a directional move. Watch support and resistance for a break that would provide the next directional signal. Chart 7 shows the Corn ETN (CORN) triangulating with resistance at 42.
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Chart 6
