SPY REMAINS BELOW SUPPORT BREAK -- BROKEN SUPPORTS MARK FIRST RESISTANCE FOR XLY AND XLI -- XLF AND SMH TESTS 200DAY MOVING AVERAGES -- GOLD BATTLES SUPPORT AS STOCHASTICS REMAINS OVERSOLD -- DOLLAR AND TREASURIES CONTROL THE RISK-OFF TRADE
SPY REMAINS BELOW SUPPORT BREAK... Link for todays video. After a shellacking the first half of May, stocks finally firmed this week and the major index ETFs moved into short-term trading ranges. This, however, is not enough to undo the technical damage done the first three weeks of May. We perhaps had a mini selling climax when the S&P 500 ETF (SPY) closed below 130 on over 300 million shares on May 18th. In last Fridays market message, I suggested that an SPY selling climax required at least a 5-day 5% decline with volume exceeding 300 million shares. SPY stopped short of the 5% threshold, but volume did exceed 300 million shares last Friday. I will consider this as a partial selling climax, which means we have yet to see the final low or selling climax.
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Chart 1
Chart 1 shows SPY firming with a pennant this week. A break above pennant resistance would be positive and open the door to the 135 area. Pennants, however, are continuation patterns. After the support break and May decline, this means the pennant carries a bearish bias. A break below pennant support would signal a continuation of the May decline and target further weakness towards the 200-day moving average (127.5) and perhaps the 50% retracement line (124.25). The bulk of the medium-term evidence remains bearish and it will take more than an oversold bounce to put the bulls back in the drivers seat. Chart 2 shows the S&P 500 for reference.
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Chart 2
BROKEN SUPPORTS MARK FIRST RESISTANCE FOR XLY AND XLI... A basic tenet of technical analysis is that broken support turns into resistance. The reverse is also true: broken resistance turns into support. Many ETFs broke well-established support levels with the May decline. These support levels now turn into the first resistance levels to watch. Chart 3 shows the Consumer Discretionary SPDR (XLY) forming a bullish engulfing on Monday and edging higher the last few days. The ETF was severely oversold with the move to 42 and this looks like an oversold bounce. With two support levels broken on the way down, we can extend these to mark a resistance zone around 43.5-44. Chart 4 shows the Industrials SPDR (XLI) with broken supports turning resistance in the 35.5-35.8 area.
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Chart 3
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Chart 4
XLF AND SMH TESTS 200DAY MOVING AVERAGES... Chart 5 shows the Finance SPDR (XLF) breaking support in early May and falling to the 200day moving average. The ETF firmed at this key moving average, and thats about it. There was not much of a bounce and XLF may not make it back to broken support. This makes the looks vulnerable to further weakness. A break below 13.75 would signal a continuation lower and forecast a break below the 200-day.
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Chart 5
Chart 6 shows the Market Vectors Semiconductor ETF (SMH) breaking below the 200-day moving average the last few days. As with XLF, this key ETF failed to bounce this week and may not make it back to broken support around 33. Notice how the Price Relative broke below its December lows. This means SMH shows relative weakness and is underperforming the broader market.
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Chart 6
GOLD BATTLES SUPPORT AS STOCHASTICS REMAINS OVERSOLD... Gold and the Gold SPDR (GLD) remain at interesting junctures. First, note that gold peaked in late February and is currently in a downtrend on the daily chart. Despite this downtrend, chart 7 shows the Gold SPDR testing support around 150 the last two days. GLD dipped below 150 last week and thenh closed near 155 with a morning doji star. The ETF again dipped below 150 this week and, but recovered with a hammer-esque candlestick and is currently around 152. With this weeks dip, GLD established a clear resistance level to watch for a breakout. A move above last weeks high would suggest a successful support break and trend reversal.
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Chart 7
Chart 8 shows weekly bars for GLD over the last three years. The importance of support in the 150 area is clear. A break below these lows would signal a continuation lower and target a move to the next support zone in the low 130s. The indicator window shows the 14-week Stochastic Oscillator below 20 and below its signal line. This is both oversold and bearish. With the indicator below 20, a cross above the signal line (red) carries less influence. Instead, I would look for a cross back above 20 to signal a successful support test and upturn in prices on this weekly chart.
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Chart 8
DOLLAR AND TREASURIES CONTROL THE RISK-OFF TRADE ... Stocks and the Dollar remain the big wild cards for gold. By extension, the Euro is big wild card for the Dollar and stocks. In short, a lot is riding on outcome of the latest EU crisis. As in the US, it is a three day weekend for most of Europe (Pentecost). This means we may have a news hiatus until at least Tuesday, and most likely into early June because the Greek elections are not until June 17th. In the meantime, we can expect plenty of market moving rumors and EU jawboning. These will no doubt center on an ECB guarantee for European bank deposits and German attitudes towards Eurobonds. The markets are currently in risk-off mode, which is bearish for stocks, oil and the Euro, but bullish for the Dollar and treasuries. Gold is positively correlated with stocks and the Euro. For clues on a shift from risk-off to risk-on, chartists should watch treasuries and the Dollar. Chart 9 shows the US Dollar Fund (UUP) breaking out over the last two weeks and challenging its January high. This breakout is bullish until proven otherwise. A sharp move back below 22.20 would negate the breakout and call for a reassessment. Chart 10 shows the 7-10 year T-Bond ETF (IEF) breaking resistance and hitting a 52-week high this month. A move below 104 is needed before we can question this breakout.
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Chart 9
