DIA FAILS AT BROKEN SUPPORT AGAIN -- MID-CAP PRICE RELATIVE BREAKS TO NEW LOW -- BASE METALS ETF NEARS 52-WEEK LOW -- SHANGHAI COMPOSITE BREAKS TRIANGLE SUPPORT -- ITALIAN STOCKS LEAD EUROPE LOWER WITH WEAK CLOSE
DIA FAILS AT BROKEN SUPPORT AGAIN... Link for todays video. A key tenet of technical analysis suggests that broken support turns into resistance. The reverse is also true as broken resistance turns into support. While it does not work all the time, it works often enough to keep in mind when studying your charts. Chart 1 shows the Dow Industrials SPDR (DIA) hitting resistance from broken support for the second time in three weeks. DIA broke support in the 126 area with the May decline and hit resistance here in late May. After testing the 200-day moving average in early June, DIA surged back to broken support for another test. Notice that DIA opened above 126 and moved below 125 to form a long filled candlestick. This resistance level is earning its keep and it would take a close above 127 to suggest otherwise.
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Chart 1
The indicator window shows RSI breaking down in May and then bouncing back to the 50-60 zone in early June. RSI resistance is set in this zone during a downtrend. In other words, this zone is expected to hold and mark a momentum peak. A break above 60 would be bullish for momentum and could be used to confirm a breakout in the ETF.
MID-CAP PRICE RELATIVE BREAKS TO NEW LOW... Relative performance of small-caps and mid-caps remains a concern for the overall market. These stocks represent high-beta stocks that are closely tied to US economic performance. They derive a higher percentage of their revenues domestically than large-caps. In essence, small and mid-caps are the canaries in the economic coal mine. Chart 2 shows the Russell 2000 ETF (IWM) breaking neckline support with a sharp decline in May and broken support turning resistance the last few weeks. Twice in the last three days the ETF opened near resistance, but closed well below the open to form long filled candlesticks. These confirm resistance at 78 and a close above this level is needed to revive los toros. The indicator window shows the Price Relative moving sharply lower in February-March and then drifting lower the last two months. Relative to SPY, IWM continues to show relative weakness and this is negative overall.
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Chart 2
Chart 3 shows the S&P MidCap 400 SPDR (MDY) failing below broken support and the late May high. MDY is even weaker than IWM. As with IWM, the ETF opened strong on Thursday and Monday, but selling pressure took hold and drove prices lower by the close. Two long filled candlesticks formed and it looks like the 200-day moving average will be challenged soon. The indicator window shows the Price Relative (MDY:SPY ratio) breaking below its April-May lows and recording a new 2012 low.
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Chart 3
BASE METALS ETF NEARS 52-WEEK LOW... Weakness in energy and base metals has to be one of the big economic stories for 2012. Chart 4 shows the Base Metals ETF (DBB) hitting resistance early in the year and then falling sharply from March to June. The ETF is on the verge of breaking the 2011 lows and recording a new 52-week low. With stocks and base metals positively correlated, a downtrend in base metals is bearish for stocks and a 52-week low would be even more bearish. Base metal prices are driven on demand, which is a function of economic performance. Declining prices suggest falling demand and this indicates economic weakness.
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Chart 4
Chart 5 shows the US Oil Fund (USO) following the stock market and the Euro on Monday. USO opened firm, but quickly sold off as the risk-off trade returned on Monday. The oil market is thus far not concerned with developments in the Middle East. Oil seems to have the same focus as base metals right now. On the price chart, USO remains in a free fall with the next support zone in the 29-30 area. This equates to the $76-$80 area for Spot Light Crude ($WTIC). With last weeks pop and drop, USO established first resistance at 33.
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Chart 5
SHANGHAI COMPOSITE BREAKS TRIANGLE SUPPORT... The Chinese economy plays an important role in the demand for base metals and energy. Last week China cut interest rates for the first time since 2008. This is part of an ongoing effort to engineer a soft landing for the slowing economy. Chart 6 shows the Shanghai Composite ($SSEC) answering this cut with a cut of its own. The index hit resistance at the falling 200-day moving average and broke triangle support with a sharp decline. Even though the index rebounded above 2300 on Monday, todays weakness in the US and Europe may hit Asia tomorrow. Regardless, the stock market behind the second largest economy in the world broke down and this is not a good sign for the global economy.
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Chart 6
ITALIAN STOCKS LEAD EUROPE LOWER WITH WEAK CLOSE... Led by Spanish banking stocks, European stocks surged on Mondays open, but gave back these early gains and closed mixed at best. Over the weekend, the Spanish government requested assistance for its banking system and EU finance ministers accepted this request. Even though news reports pegged the bailout at 100 billion Euros, there are really few details on the amount, the source of funds and the conditions of the bailout. It seems we have another one of those wheres the beef moments. Stocks surged on the initial news, but then gave it all back when the details, or lack there of, became reality. EU stocks are also bracing for election results in Greece this weekend. The elections will not mark the endgame because the parties with the highest percentages will then need to form a coalition, which will take a few days at least. Short answer: there are no silver bullets on offer any time soon.
What is a technical analyst to do? Keep the news in the background and the charts in the foreground. Of course! Chart 7 shows the DJ Spain Index ($ESDOW) surging above 250 in early trading and then moving below 240 in the afternoon. The index gave up all of its gains and closed for a loss on the day. Overall, the index remains in a downtrend with the consolidation in late April and early May marking the first resistance zone. Chart 8 shows the DJ Italy Stock Index ($ITDOW) faring even worse as it surged near 110 in early trading and fell below 105 by the close. The index lost over 2.5% on the day as investors turned their eye towards Italian debt.
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Chart 7
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Chart 8
Chart 9 shows the European Top 100 Index ($EUR), which represents 100 of the top stocks across Europe. The finance sector is the biggest sector and over 50% of the index components come from France and Germany. It is a good index to watch for clues on the financial health of Europe as a whole. $EUR also surged in early trading and also gave back its early gains. The index failed to hold its break above the late May highs. The indicator window shows $EUR relative to the S&P 500 using the $EUR:$SPX ratio. Even though the ratio flattened the last six weeks, it has yet to turn up and European stocks remain relatively weak. A serious market move to risk-on requires European stocks to start outperforming US stocks and this Price Relative needs to break above its May high.
