PRICE RELATIVE CONTINUES TO SINK FOR RUSSELL 2000 -- IWM BREAKS CONSOLIDATION SUPPORT AS MDY HOLDS CONSOLIDATION -- DOLLAR FOLLOWS THROUGH ON REVERSAL DAY -- MCCLELLAN OSCILLATOR TURNS NEGATIVE AS NASDAQ ADVANCES
PRICE RELATIVE CONTINUES TO SINK FOR RUSSELL 2000 ... Link for todays video. Relative weakness in small-caps remains a concern because small companies are the canaries in the economic coalmine. Smaller companies are less diversified and have less exposure abroad, which makes them more vulnerable to changes in the US economy. Chart 1 shows the performance of the Russell 2000 ($RUT) relative to the S&P 100 ($OEX) using the Price Relative ($RUT:$OEX ratio). This ratio rises when small-caps outperform and falls when small-caps underperform. Small-caps outperformed in October and January with a bout of flat performance in between (November-December). February was a different story as the $RUT:$OEX ratio fell rather sharply. This is because IWM traded flat as the S&P 100 moved higher. The blue dotted line marks the start of underperformance on February 3rd.
(click to view a live version of this chart)
Chart 1
IWM BREAKS CONSOLIDATION SUPPORT AS MDY HOLDS CONSOLIDATION... The Russell 2000 ETF (IWM) and S&P MidCap 400 SPDR (MDY) are perhaps the most important charts to watch right now. Support breaks in both would be negative for the market overall, while resistance breaks would be positive and keep the bull run alive. Chart 2 shows IWM advancing over 20% from late November to early February and then consolidating with a tight trading range. As of Friday noon, the ETF is showing absolute weakness with a break below support. This break argues for a correction of the prior advance and targets a correction towards the 75-76 area. The flat 200-day moving average, broken resistance and the 38-50% retracement mark support here.
(click to view a live version of this chart)
Chart 2
Chart 3 shows the S&P MidCap 400 SPDR (MDY) peaking two weeks after IWM and consolidating since February 17th. Relative to the S&P 500 ETF, MDY is showing relative weakness since trading flat the last two weeks. The range over the last two weeks has been quite narrow, which indicates a volatility contraction. As noted by John Bollinger, a volatility contraction can give way to a volatility expansion or directional move. Chartists should watch the consolidation boundaries for the first directional clue.
(click to view a live version of this chart)
Chart 3
DOLLAR FOLLOWS THROUGH ON REVERSAL DAY... I wrote about the US Dollar Fund (UUP) forming a bullish engulfing at a key retracement on Wednesday. Today, the ETF is following through with a surge above 22. Chart 4 shows UUP challenging the upper trendline of a falling wedge. As noted on Wednesday, the falling wedge and the retracement amount are both typical for corrections within bigger uptrends. The mid February high marks the next resistance hurdle at 22.30. Momentum is also improving as the indicator window shows MACD forming a small bullish divergence and moving above its signal line. Chart 5 shows the Euro Currency Trust (FXE) testing support from the January trendline.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
Chart 6 shows a long-term perspective for UUP with weekly price bars. Since the summer breakout, the overall trend here has been up, even though only slightly. More recently, the ETF has been battling to hold support in the 21.7-21.8 area. This weeks surge could signal a successful support test and resumption of the uptrend.
(click to view a live version of this chart)
Chart 6
MCCLELLAN OSCILLATORS TURN NEGATIVE AS NASDAQ AND NY COMPOSITE ADVANCE... Even though the NY Composite and the Nasdaq continued higher the last three weeks, the McClellan Oscillators turned negative on February 10th and the Summation Indices moved lower. A correction could be nearing because breadth is not keeping pace with recent gains. First, lets review the McClellan Oscillator and McClellan Summation Index. Developed by Sherman and Marian McClellan, the McClellan Oscillator equals the 19-day EMA of the Net Advances Ratio less the 39-day EMA of the Net Advances Ratio. The Net Advances Ratio equals advances less declines divided by total issues. Like MACD, the resulting indicator forms an oscillator that fluctuates above and below the zero line. Basically, the McClellan Oscillator measures the momentum of breadth. The McClellan Summation Index is the sum of each days McClellan Oscillator reading. The Summation Index declines when the oscillator is negative and advances when positive. You can read more on these indicators in our ChartSchool
Chart 7 shows the NYSE Summation Index ($NYSI) in the main window and the McClellan Oscillator ($NYMO) in the indicator window. The oscillator turned negative on 10-Feb and has not moved back into positive territory. This is unusual because the NY Composite moved higher the last three weeks. The negative readings in the McClellan Oscillator indicate selling pressure under the surface. Also notice that the Summation Index peaked and moved below its 5-day EMA. Chart 8 shows the Nasdaq Summation Index ($NASI) and McClellan Oscillator ($NAMO) with similar characteristics.
(click to view a live version of this chart)
Chart 7
