SMALL AND MID CAP ETFS STALL NEAR RESISTANCE -- MDY FORMS HANGING MAN ON WEEKLY CHART -- SPY STALLS ABOVE BREAKOUT -- XLU BREAKS CONSOLIDATION RESISTANCE -- VOLATILITY INDICES NEAR JULY LOWS
SMALL AND MID CAP ETFS STALL NEAR RESISTANCE... Link for todays video. While the S&P 500 ETF (SPY), Dow Industrials SPDR (DIA) and Nasdaq 100 ETF (QQQ) easily broke above their 2011 highs, the S&P MidCap 400 SPDR (MDY) and Russell 2000 ETF (IWM) have yet to clear these highs and show some relative weakness. IWM represents small-caps because it is based on the Russell 2000 small-cap index. MDY represents mid-caps because it is based on the S&P MidCap 400 Index. As noted before, small and mid caps are like the canaries in the economic coal mine. They are the first to benefit from a rebounding economy and the first to suffer from an economic slow down. On the price chart, these ETFs have yet to actually break down, but they are stalling at resistance and should be watched closely in the coming days and weeks because this is a make-or-break area.
Chart 1 shows the Russell 2000 ETF surging above 80 with a long hollow candlestick and then stalling the last five weeks. Trading for most of the last five weeks has been contained with this long hollow candlestick. This stall shows indecision, but does not mark a serious increase in selling pressure. After all, IWM is still trading above 80 and remains a relatively high level. With the sharp decline and rebound last week, the ETF established first support at 78. A break below this support level would provide the first significant sign of selling pressure. The indicator window shows Aroon Up moving above Aroon Down in early December and remaining in bull mode. Aroon Down needs to cross back below Aroon Up to reverse this signal.
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Chart 1
MDY FORMS HANGING MAN ON WEEKLY CHART... Chart 2 shows the S&P MidCap 400 SPDR also stalling the last five weeks. The ETF surged above 175 at the end of January and then closed below 180 the next five weeks. Last weeks candlestick looks like a hanging man (small body and long lower shadow). These candlesticks signal indecision and a close below last weeks low would confirm a medium-term reversal. The indicator window shows RSI moving higher since August. Chartists can sometimes draw trendlines on momentum oscillators to define the ascent or descent. A move below the August trendline would reverse the current advance in RSI and be negative for momentum.
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Chart 2
SPY STALLS ABOVE BREAKOUT... The Rydex S&P Equal Weight ETF and the S&P 500 ETF (SPY) offer perhaps the best comparison between large-caps and the rest of the market. Both ETFs are based on the S&P 500 but the Rydex S&P Equal Weight ETF treats each stock equally. Apple Corp (APPL), which has a market cap of $511 billion, counts the same as SuperValu (SVU), which has a market cap of just $1.34 billion. Believe it or not, there are more small and mid cap stocks in the S&P 500 than large cap stocks. With all stocks equally weighed, this means the Rydex S&P Equal Weight ETF represents small and mid-caps. The market-cap weighed S&P 500 ETF (SPY) is clearly tilted towards large-caps because the top ten components account for over 20% of the ETF and the top fifty components account for over 50%. This means the remaining 450 stocks account for the other 50%.
Chart 3 shows the S&P 500 ETF breaking above its 2011 highs and stalling the last four weeks. The cup is clearly half full (bullish) as long as SPY remains above this breakout. Broken resistance turned into support and this level held last week. A move below last weeks low would question the breakout and argue for a correction that could extend back to the 128 area. The indicator window shows MACD moving higher and remaining above its signal line. Momentum favors the bulls as long as MACD remains above this line.
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Chart 3
In contrast to SPY, chart 4 shows the Rydex S&P Equal Weight ETF stalling just below the 2011 highs. The ETF surged above 51 five weeks ago, but failed to break to new highs and confirm the breakout in SPY. Chart-wise, RSP is not as strong as SPY. Put another way, RSP shows relative weakness and is underperforming SPY. Nevertheless, RSP has yet to actually break down or show signs of material selling pressure. As with the other ETFs, RSP established first support with last weeks low. A move below this level and a MACD signal line cross would provide the first signs of noteworthy weakness.
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Chart 4
XLU BREAKS CONSOLIDATION RESISTANCE... Chart 5 shows the Utilities SPDR (XLU) perking up with a strong move above consolidation resistance. I featured this chart last week as the ETF remained within its trading range. Todays breakout signals a continuation of the bigger uptrend and targets a move above the early January high. The mid February lows now mark key support. This breakout comes at an interesting juncture for the stock market, which is overbought and ripe for a correction. Renewed leadership from this defensive oriented sector may signal a flight to safety as risk of a correction increases. Chart 6 shows the Consumer Staples SPDR (XLP) hitting a new 52-week high today. The indicator window shows the XLP:XLY ratio, which compares the performance of the consumer staples sector to the consumer discretionary sector. The consumer discretionary sector is currently winning (outperforming), but a break above resistance would reflect a move into consumer staples and a more defensive market.
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Chart 5
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Chart 6
VOLATILITY INDICES NEAR JULY LOWS... As their name implies, the CBOE Volatility Index ($VIX) and the Nasdaq 100 Volatility Index ($VXN) measure the implied volatility for a basket of options representing their respective indices. Rising volatility signals increasing risk and this is negative for stocks. Falling volatility signals decreasing risk and this is positive for stocks. In general, stocks rise as volatility decreases and stocks fall as volatility increases. This means the volatility indices are negatively correlated with the underlying indices.
Theses volatility indices are also known as fear indices. Excessively high volatility (fear) can signal a panic and foreshadow a stock market bottom. Conversely, excessively low volatility (fearless) can signal complacency and foreshadow a stock market top. Picking the tipping point is difficult because volatility can move to relatively low levels and remain low as stocks trend higher. It is, therefore, important to confirm volatility analysis with other aspects of technical analysis, such as a support break in the major index ETFs.
Chart 7 shows the CBOE Volatility Index moving below its February low and reaching its lowest level since early July 2011. This is interesting because the S&P 500 peaked in July 2011 and declined sharply into August. This breakdown in $SPX coincided with an upside breakout in volatility (red arrows). Chart 8 shows the Nasdaq 100 Volatility Index with similar characteristics.
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Chart 7
