FINANCE SPDR ON THE VERGE OF TREND REVERSAL -- RETAIL SPDR TRACES OUT DOUBLE TOP -- ON BALANCE VOLUME MOVES SHARPLY LOWER FOR XLY -- HOME BUILDERS AND REITS CONTINUE SHOWING RELATIVE STRENGTH -- COMMODITIES AND BIG EMERGING MARKETS FALLING TOGETHER
FINANCE SPDR ON THE VERGE OF TREND REVERSAL ... Link for todays video. The Finance SPDR (XLF) broke an important support level last week and is on the verge of breaking another this week. I first marked key support at the February-March lows in the market message on April 18th and then raised key support to the April lows in the May 7th market message. Chart 1 shows XLF breaking below the April lows with a sharp decline last week and testing the February-March lows this week. Even though XLF has yet to break this second support level, the bearish evidence is piling up. First, XLF broke the trendline extending up from the October low. Second, the 13-week sloped turned negative. Third, the 13-week slope moved below the 52-week slope (red arrows). The ETF traded flat for three months after the first two crossovers and declined sharply after the third crossover. With this fourth crossover and recent support break, the outlook is not promising for XLF.
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Chart 1
On a fundamental note, the market appears to be pricing-in new information, bearish information. First, the prospects of a Greek default increased over the last two weeks. On Tuesday, depositors withdrew some 700 million Euros from Greek banks. EU banks are exposed to Greece and US banks are exposed to EU banks. A default and/or run on the Greek banks would be quite negative for the TBTF banks in the US (too big to fail). Second, JP Morgan Chases trading loss increases the chances of further regulation in the banking sector, especially for the TBTF banks, which combine retail deposits and sophisticated trading operations. Chart 2 shows the Regional Bank SPDR (KRE) breaking above its 2011 highs and then consolidating. Notice that KRE has held up better than XLF over the last two weeks, but may not be immune to a broader market swoon. Broken resistance and the January-February lows mark support in the 25.5 area.
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Chart 2
RETAIL SPDR TRACES OUT DOUBLE TOP... The Retail SPDR (XRT) and the Consumer Discretionary SPDR (XLY) have been two of the strongest ETFs this year. XRT is up some 13% year-to-date, while XLY is up over 11% since December 30th. As noted before, performance of these two is critical to the overall market and support breaks would be bearish. Chart 3 shows XRT with a double top taking shape since early March. There are two highs around 63 and intermittent lows around 58.5. A break below these lows would confirm the pattern and project further weakness towards the 54 area. The height of the pattern (4.5) is subtracted from the support break for a target (58.5 4.5 = 54). Support can also be found in the 53-54 area from broken resistance and a Fibonacci cluster. Support has yet to fall, but MACD remains in negative territory and momentum is currently bearish. MACD needs to break its early May high to turn momentum fully bullish again. Separately, the Commerce Department reported a small rise (.1%) for April retail sales and revised retail sales for February and March lower. Chart 4 shows the Market Vectors Retail ETF (RTH) for reference.
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Chart 3
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Chart 4
ON BALANCE VOLUME MOVES SHARPLY LOWER FOR XLY... Retail plays a big role in the Consumer Discretionary SPDR (XLY) and XLY plays a big role in the broader market. A breakdown in XRT would likely lead to a support break in XLY and this would be bearish for stocks in general. Chart 5 shows the XLY testing support from the April low. The ETF hit a new high above 46 just a few weeks ago and is already back at support. A support break would reverse this uptrend and call for a deeper correction of the prior advance. The first support zone is set around 41, which is marked by the late January consolidation and first Fibonacci cluster. Second support is set around 39-40. Selling pressure increased significantly the last few weeks as downside volume outpaced upside volume. This is reflected in On Balance Volume (OBV), which moved to its lowest level since early October. OBV is a cumulative indicator that adds volume on up days and subtracts volume on down days. OBV broke support in mid April, formed a lower high in early May and forged a lower low in mid May. According to Joe Granville, creator of OBV, volume precedes price. This suggests that XLY will break support and test at least the first support zone.
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Chart 5
HOME BUILDERS AND REITS CONTINUE SHOWING RELATIVE STRENGTH... Even though the finance and consumer discretionary sectors are on the verge of breakdowns and trend reversals, there are pockets of relative strength to be found within these sectors. Since mid April, five sectors are down and three are up. The Consumer Staples SPDR (XLP), Healthcare SPDR (XLV) and Utilities SPDR (XLU), which are the defensive sectors, have attracted money during the most recent decline. This makes sense because money gravitates to relative safety during a broad market decline. Outside of these three sectors, we are seeing continued relative strength in the home building group and REITs. Homebuilders come from the consumer discretionary sector, while REITs are in the finance sector. The link makes sense because both are tied to real estate and real estate is performing quite well at the moment. Real estate represents an alternative to stocks, there is little exposure to Greece and financial regulation is aimed at the big banks. REITs also provide decent dividends, which count in a low interest rate environment. Chart 6 shows the Home Construction iShares (ITB) trading near a 52-week high and well above the April low. Prices just continue to zigzag higher. Chartists may be wondering how to jump on a moving train with a better risk-reward ratio. One suggestion is to use a short-term momentum oscillator to identify oversold conditions. The indicator window shows 5-period RSI dipping below 30 five times since the rally began in early October. A subsequent surge back above 50 signals that momentum has turned up from oversold levels. Keep in mind that past performance does not guarantee future performance.
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Chart 6
Chart 7 shows the Real Estate iShares (IYR) within a clear uptrend and well above its April low. A falling flag is taking shape the last two weeks as IYR works off overbought conditions. 5-period RSI dipped below 30 for the fourth time since the October low.
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Chart 7
COMMODITIES AND BIG EMERGING MARKETS FALLING TOGETHER... Commodities and the CRB Index ($CRB) are moving in sync with the big emerging markets. In Tuesdays market message, John Murphy pointed out the recent support break in the CRB Index ($CRB). The three month decline in the CRB Index matches up with the three month decline in the BRIC SPDR (BIK). BRIC stands fro Brazil, Russia, India and China. The positive correlation between these big emerging markets and commodities makes sense. Brazil and Russia are big commodity producers, while all four are big commodity consumers. Chart 8 shows the CRB Index (bars) and the BRIC SPDR (pink line). These two have been moving step-for-step the last three years. This positive correlation is quantified by the 10-week Correlation Coefficient in the indicator window. Except for a brief dip below zero in September 2009, the Correlation Coefficient has been positive the last three years and spent much of its time above .50.
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Chart 8
Chart 9 shows the BRIC SPDR (BIK) breaking the upswing trendline in early April and falling sharply the last three weeks. Also notice that a lower high formed in February and this breakdown signals a continuation of the prior decline. It looks like a long-term downtrend is unfolding, which projects a move below the October low.
