QQQ FAILS TO HOLD BREAKOUT AS CCI TURNS NEGATIVE -- IWM KEEPS HEAD-AND-SHOULDERS PATTERN ALIVE -- TREASURIES MOVE HIGHER AS STOCKS MOVE LOWER -- OIL BREAKS RISING WEDGE SUPPORT -- ENERGY SPDR FAILS AT KEY RETRACEMENT ZONE
QQQ FAILS TO HOLD BREAKOUT AS CCI TURNS NEGATIVE... Link for todays video. Stocks fell after the employment report showed non-farm payrolls increasing just 115,000, which was below expectations. Todays report caps a week of less-than-stellar economic reports. While I would not consider this weeks economic reports bad, they did reflect a slowing growth rate and were certainly not great. After a big surge last week, the Dow was trading back near its March highs and the other major indices were trading well above support. Perhaps stocks were priced for great growth, not average growth. In any case, chart 1 shows the Nasdaq 100 ETF (QQQ) falling back into last weeks gap zone. QQQ broke channel resistance with a big surge in late April, consolidated for a few days and then moved lower instead of higher. The Commodity Channel Index (CCI) broke out with a move above the red trendline and into positive territory. However, CCI also failed to hold its breakout and moved back into negative territory. While I am not ready to turn medium-term or even long-term bearish, this breakout failure is a concern and could lead to a deeper pullback. The early March low and 38.2% retracement mark the next support zone in the 63 area.
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Chart 1
IWM KEEPS HEAD-AND-SHOULDERS PATTERN ALIVE... In the 20-April Market Message I wrote about potential head-and-shoulders patterns in the Dow Industrials SPDR (DIA), S&P MidCap 400 SPDR (MDY) and Industrials SPDR (XLI). DIA and MDY went on to challenge their March highs and negate these patterns. With both backing off their March highs, perhaps double tops are taking shape now. Regardless, the March-April lows mark key support and it would take a break below these support zones to confirm the patterns.
Elsewhere on the charts, I am still seeing potential head-and-shoulders patterns in the Industrials SPDR (XLI) and Russell 2000 ETF (IWM). Chart 2 shows IWM within a trading range since early February. IWM has gone nowhere the last three months. With a higher around 85 in March and two lower highs on either side, a clear head-and-shoulders pattern is taking shape. The March-April lows mark neckline support at 78 and a break below these lows would project further weakness towards the 73-75 area. Support here stems from the 50-61.80% retracement zone, the flat 200-day SMA and broken resistance from the early December high. Also notice the downside volume (red bars) has been outpacing upside volume since the March high and IWM continues to show relative weakness as the Price Relative sinks.
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Chart 2
What exactly does a head-and-shoulders tell us? The right half of the pattern holds the key information. After a new high (head), prices decline all the way to the prior low. IWM peaked at 85 and declined all the way to the March low. A decline all the way back to the prior low shows an increase in selling pressure. After this decline, the security bounces and forms a lower high. IWM peaked around 82.5 and fell well short of its March high. This lower high shows diminished buying pressure. We now have evidence of increased selling pressure and diminished buying pressure. Neckline support holds the final clue. A break signals that selling pressure has expanded to a new level and the trend reverses. Volume plays an important part in confirming the increase in selling pressure. Before getting prematurely bearish, keep in mind that the head-and-shoulders pattern is just a consolidation as long as neckline support holds. The advance from October to March was sharp and stocks are entitled to a rest. It takes a neckline break to turn this rest into a reversal and start a downtrend. Also keep in mind that not all head-and-shoulders patterns work out as envisioned. Chart 3 shows XLI breaking rising wedge support as a head-and-shoulders pattern takes shape.
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Chart 3
TREASURIES MOVE HIGHER AS STOCKS MOVE LOWER... The negative correlation between stocks and treasuries is playing out on Friday. Todays worse-than-expected jobs report is putting a bid into treasuries because weak job growth increases the chances of a sluggish economy and this increases the chances more Fed stimulus. Treasuries could also be moving higher because oil is moving sharply lower (less inflation) and the Euro turned lower (risk-off trade). Chart 4 shows the 20+ Year T-Bond ETF (TLT) poised to challenge the April high after a pennant breakout today. The trend since early April is up and I am marking key support at 116 now. Failure to hold the pennant breakout and a move below key support would be bearish. Chart 5 shows the 7-10 year T-Bond ETF (IEF) moving above its January high. Chart 6 shows the 10-year Treasury Yield ($TNX) moving below 1.9% (19 on the chart).
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Chart 4
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Chart 5
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Chart 6
OIL BREAKS RISING WEDGE SUPPORT... Spot Light Crude ($WTIC) remains in a long-term uptrend, but a recent breakdown on the daily chart spells trouble. Chart 7 shows weekly bars for $WTIC and uptrend over the last three years. This uptrend may be in jeopardy because a lower high formed in the first quarter. Buying pressure was not strong enough to push prices past the 2011 high and we are now seeing selling pressure on the daily chart. Even a correction within this uptrend could extend to the low 90s. Support here stems from the December low and the 50-61.80% retracement zone.
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Chart 7
Chart 8 shows daily candlesticks and the rising wedge support break on Thursday. This break signals a continuation of the prior decline (late February to early April). The yellow zone in the 93-95 area marks support from the prior lows, which extend from late November to early February. Chart 9 shows the US Oil Fund (USO) for reference.
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Chart 8
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Chart 9
ENERGY SPDR FAILS AT KEY RETRACEMENT ZONE... The Energy SPDR (XLE) bounced back to broken support, but the bigger downtrend pulled trump this week and the ETF failed at this support break. Chart 10 shows XLE breaking support around 72 in late March and early April. Broken support turned into a resistance and held this week. Also note that the 72-73 zone marks a 50-61.80% retracement of the prior decline (February to April). The combination of broken support and the retracement zone proved too much as the downtrend continued in earnest the last three days.
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Chart 10
The first two indicator windows show relative performance indicators and the third shows the Energy Bullish% Index ($BPENER). The Price Relative (XLE:SPY ratio) bounced in February, but broke down in early March and remains in a downtrend as XLE shows relative weakness. The StockCharts Technical Rank (SCTR) first broke below 50 in mid March and has remained below 50 since early April. 50 is the bull-bear line in the sand. An SCTR above 50 favors the bulls, while an SCTR below 50 favors the bears. The Bullish Percent Index broke below 50% the second week of April and remains below 50% (40%). This means that 60% of the components in this sector are on P&F sell signals (Double Bottom Breakdowns). All in all, the outlook does not look positive for the energy sector right now. Chart 11 shows the Oil & Gas Equipment/Services SPDR (XES) turning back near broke support this week.
