APPLE AND GOOGLE LEAD NASDAQ 100 ETF LOWER -- MARCH LOWS MARK FIRST SIGNIFICANT SUPPORT LEVEL -- SMALL AND MID CAPS CONTINUE TO UNDERPERFORM -- SPANISH AND ITALIAN STOCKS BREAK DOWN
APPLE AND GOOGLE LEAD NASDAQ 100 ETF LOWER... Link for todays video. Tech stocks moved sharply lower in early trading on Friday with the Nasdaq 100 ETF (QQQ) declining over 1%. Chart 1 shows QQQ moving below 66 with its sharpest decline since December. The first support zone to watch is in the 63 area. Potential support stems from the 38.2% retracement and the early March low. The indicator window shows the Commodity Channel Index (CCI) moving below 20 for the first time since November. Even though this is technically oversold, it is also a sign of weakness. Notice how CCI became overbought in early January and remained positive for over three months. Overbought is a sign of strength or strong upside momentum, while oversold is a sign of weakness or strong downside momentum. Such a surge in downside momentum suggests that this correction has further room to run.
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Chart 1
As the chart above shows, Apple (AAPL) is by far the single biggest component (19.39%) for QQQ and Google (GOOG) is the third largest component (5.6%). Together, these two account for around 25% of the ETF. Chart 2 shows Apple moving below 600 with a long black candlestick early Friday. A down close today would be the fifth consecutive lower close, which has not occurred since September. For support, a 38.2% retracement of the November-March advance marks the first support zone around 540. The indicator window shows CCI becoming oversold with the strongest downside momentum since November.
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Chart 2
Chart 3 shows Google gapping above 640 last Thursday and then filling this gap with a sharp decline the last two days. The stock broke the January trendline and support from the early April low in the process. Google has been rather volatile the last six months with three swings in excess of 80 points. Even though the most recent upswing was reversed with todays support break, the stock may find some support around 600 from the February-March lows and 61.80% retracement mark.
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Chart 3
MARCH LOWS MARK FIRST SIGNIFICANT SUPPORT FOR IWM... I like to use the Russell 2000 ETF (IWM) and the Rydex S&P Equal Weight ETF (RSP) for a good perspective on the broader stock market. The Russell 2000 represents some 2000 small-cap stocks, while the Rydex S&P Equal Weight ETF treats all S&P 500 components equally. Equal weighting filters out the affects of a few large caps (like Apple). Even after sharp decline the last three weeks, both have yet to break support from the March low. These lows mark the first key levels to watch. Support breaks would argue for a deeper correction that could retrace around 50% of the October-March advance. Chart 4 shows a weekly chart of IWM with the ETF confirming support at 78 with last weeks low. The Aroon oscillators are shown in the indicator window with Aroon Up (green) trading above Aroon Down (red) since early December (bull mode). Aroon Down needs to cross Aroon Up to reverse this signal.
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Chart 4
Chart 5 shows the Rydex S&P Equal Weight ETF (RSP) surging to a new 52-week high in early march, but moving back below 51 in early April. Even though the breakout and new high did not hold, the ETF did record a higher high and remains in an uptrend overall. The March low marks first support just above 49. Upside momentum is slowing as the Percent Price Oscillator (PPO) rolls over and tests its signal line (9-period EMA).
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Chart 5
SMALL AND MID CAPS CONTINUE TO UNDERPERFORM ... Even though the major stock indices are still in uptrends, relative weakness in small and mid-caps is a negative and could foreshadow a corrective period for stocks. Chart 6 shows the relative performance of small-caps using the Russell 2000:S&P 100 ratio ($RUT:$OEX). This ratio rises when small-caps outperform and falls when small-caps underperform. Working from left to right on the chart, notice how the ratio broke support at the beginning of August and declined until early October. There was an upside breakout in the second half of October, a consolidation in November-December and another upside breakout in mid January. Small-cap performance was relatively strong until early February, which is when the ratio peaked. With a decline the last 2 1/2 months, the ratio broke its November lows and small-caps are showing some serious relative weakness. This is negative because small-caps are more sensitive to economic fluctuations than large-caps. Relative weakness suggests that economic growth may slow in the coming months and this could in turn weigh on the broader market. Of course, any signs of slower growth in the economy would increase the chances of QE3 and a more dovish Fed, if the Fed can actually become more dovish than it already is. At this point, I think relative weakness in small-caps argues for caution because stocks are ripe for a corrective period and the six month cycle turns negative soon. Chart 7 shows S&P MidCap 400 ($MID) underperforming the S&P 500 since mid February.
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Chart 6
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Chart 7
SPANISH AND ITALIAN STOCKS BREAK DOWN... Recent concerns in Europe are reflected in the Spanish and Italian equity markets. Chart 8 shows the DJ Italy Stock Index ($ITDOW) breaking support at 128 with a sharp decline the last four weeks. After a move from 136 to 114, the Italian index is down over 15% from its March high. Even though the index is short-term oversold, such a sharp decline does not look like a mere correction. In fact, notice that the bigger pattern looks like a rising wedge and this breakdown signals a continuation of the bigger downtrend.
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Chart 8
ITALIAN BONDS UNDERPERFROM GERMAN BUNDS... The indicator window shows the Italian Treasury Bond Futures ETN (ITLY) relative to the German Bund Futures ETN (BUNL) using a ratio chart ($ITLY:$BUNL). Italian bonds represent risk and German bunds represent safety. As such, Italian bonds outperform when the ratio rises and the risk-on trade is in force. Italian bonds underperform when the ratio falls and the risk-off trade is in force. This ratio turned lower the last five weeks as Europe moved to risk-off mode. Chart 9 shows the DJ Spain Index ($ESDOW) breaking triangle support and hitting a 52-week low this month.
