DOW AND RUSSELL 2000 TESTS APRIL LOWS -- EUROPEAN TOP 100 INDEX BREAKS WEDGE TRENDLINE -- LESS THAN 50% OF $NDX AND $SPX STOCKS ARE ABOVE THEIR 50-DAY SMAS -- COMMODITY CHANNEL INDEX MOVES BELOW -200 FOR GLD
DOW AND RUSSELL 2000 TESTS OFF APRIL LOWS ... Link for todays video. With a sharp decline the last few days, chart 1 shows the Dow Industrials testing its April lows and key support in the 12700 area. A break below these lows would forge a lower trough and argue for further weakness towards the next support zone, which is around 12200. Broken resistance and the 38.2% retracement mark potential support here. Notice that there are two Fibonacci Retracements Tools on this chart. This is because there are two advances: one from the October low and another from the November low. Cant decide which one to use? Use both and then look for a cluster where the two overlap. Notice that a 50% retracement of the November-March advance would extend to this area as well.
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Chart 1
Chartists may also be wondering at what point to consider the Dow oversold. Well, there is oversold and then there is OVERSOLD. The indicator window shows the Commodity Channel Index (CCI) with horizontal lines at 200 and -200. While some traders use 100/-100 for overbought/oversold, these occurrences are too frequent and often times do not foreshadow reversals. Widening the overbought/oversold threshold reduces the number of occurrences and increases the value of such a signal. Notice that the Dow became overbought twice and oversold three times in 12 months.
Be careful with this bottom picking technique. Also notice that the Dow became oversold and remained oversold at the end of July. A security can become oversold and remain oversold in a strong downtrend. This is why chartists need to look for signs of a reversal to confirm an upturn after an oversold reading. This could be a CCI move back above -100 or a confirmed candlestick reversal on the price chart. As the chart now stands, the Dow has yet to become oversold because CCI remains well below -200. Chart 2 shows the Russell 2000 ($RUT) with similar characteristics.
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Chart 2
EUROPEAN TOP 100 INDEX BREAKS WEDGE TRENDLINE... As its name implies, the European Top 100 Index ($EUR) represents one hundred top European stocks. Over half come from France and Germany, which represent core Europe. Italy, The Netherlands and Spain are the next biggest representatives. Like the S&P 100, it is a good representation of European equities and traders can watch this index for clues on the continent. As chart 3 shows, US investors and traders should keep tabs on the European Top 100 Index for clues on the US stock market. The indicator window shows the Correlation Coefficient holding above zero the last 12 months and above .75 currently. The S&P 500 has a strong positive correlation with the European Top 100 Index. This means both tend to rise and fall together.
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Chart 3
On the price chart, the index advanced from late September to mid March and formed a large rising wedge in the process. This advance may seem quite long (6 months) and strong (>25%), but the peak around 230 fell well short of the 2011 high and formed a lower high. With this weeks decline, the index broke the rising wedge trendline and the next support zone resides around 200, which is another 5% lower. Also notice that the index formed a flat consolidation in April and broke consolidation support this week. This signals a continuation of the March-April decline and also targets further weakness to the 200 area.
LESS THAN 50% OF $NDX AND $SPX STOCKS ARE ABOVE THEIR 50-DAY SMAS... The percentage of stocks above the 50-day moving average is a breadth indicator that measures the degree of participation within an index. StockCharts.com offers this indicator for the S&P 500, Nasdaq 100 and four other indices (click here for a list).
Overall, the Nasdaq 100 %Above 50-day SMA ($NDXA50R) favors the bulls when more than 50% of its stocks are above their 50-day SMAs and the bears when less than 50% are above. As chart 4 shows, this indicator can get quite choppy around the 50% line and relying on this crossover would create a lot of whipsaws. Even so, this indicator appears good for long-term trend identification purposes. The green line marks 85% and the red line marks 15%. A surge above 85% shows enough upside participation to warrant the start of a new uptrend. Conversely, a plunge below 15% warrants enough downside participation to signal the start of a new downtrend. Think of these moves as long-term breadth thrusts. Over the last six years, there have been seven trend signals, just less than one per year. These signals will not occur at the exact bottom or top, but do trigger at the beginning of a trend and last more than a quarter (three months). As this chart now stands. The bull signal remains in force and it would take a move below 15% to turn this indicator bearish.
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Chart 4
Chart 5 shows the S&P 500 %Above 50-day SMA ($SPXA50R) with the same bullish and bearish thresholds. There have been six signals in six years because the S&P 500 remained on a bull signal from April 2003 until August 2007. Boy, wasnt that one a dandy. As with the Nasdaq 100 version, this indicator also does a good job of defining the long-term trend. It can help keep investors out of bear markets and provide a signal to re-enter the market. It can also be used by swing and position traders to establish an overall trading bias. This indicator remains in bull mode and it would take a move below 15% to trigger a bearish signal.
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Chart 5
COMMODITY CHANNEL INDEX MOVES BELOW -200 FOR GLD... Ok, it is just one day and one day does not make a trend. However, it is interesting to see the Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ) moving higher even as the Gold SPDR (GLD) moves lower. I suspect that the rally in gold stocks is in sympathy with the morning recovery in the Basic Materials SPDR (XLB), which opened below 35 and quickly moved above 35.40. First, lets take a look at gold. Chart 6 shows weekly bars for the Gold SPDR over the last four years. A strong uptrend extended from October 2008 until August 2011. After peaking, GLD formed a series of lower highs and broke the April 2009 trendline, which was touched at least five times. The nine-month trend is clearly down, but GLD may be nearing a support zone around 150. Support stems a consolidation in the first half of 2011 and the December 2011 low.
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Chart 6
Chart 7 shows GLD with daily bars over the last 13 months. GLD surged along with the stock market in January-February, but peaked in late February and moved sharply lower. Even though a corrective pattern (falling wedge) may be taking shape, the trend is clearly down as long as the wedge falls. A break above 162.5 is needed to reverse this fall. For any bottom pickers out there, note that CCI moved below -200 for the fourth time in a year. Prior dips below this level foreshadowed bounces, but not always right away. Notice that CCI formed a second dip before GLD actually reversed (blue arrow).
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Chart 7
GOLD MINERS ETF FORMS OUTSIDE REVERSAL DAY (SO FAR)... Chart 8 shows the Gold Miners ETF within a clear downtrend since September. GDX broke a major support zone in March and broken support turns resistance in the 50-52 area. A 50-61.80% retracement of the March-May decline also marks resistance in this area. Despite a clear downtrend, the bottom pickers and bargain hunters are out today as the ETF formed an outside reversal. This pattern could provide the first sign of support and give way to an oversold bounce, provided gold joins in and the Dollar helps the cause. These are still big ifs. I am also concerned with continued relative weakness in GDX relative to GLD. Notice that GDX started underperforming GLD in August-September and the Price Relative remains in a clear downtrend. A little relative strength would also be welcome for the bulls. Chart 9 shows the Junior Gold Miners ETF for reference.
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Chart 8
