ANALYZING THE 2011 RETURN TO RISK -- MARKETS REMAIN IN RISK OFF MODE AS SPY HITS RESISTANCE -- TECHNOLOGY SPDR HOLDS ISLAND REVERSAL AND QQQ HOLDS GAP -- FIRSTTRUST INTERNET ETF CHANNELS LOWER
ANALYZING THE RETURN TO RISK IN OCTOBER 2011... Link for todays video. Is the current decline a correction like August 2011 or is this the start of a bigger bear move? All bear markets start as corrections, but not all corrections lead to bear markets. Even though the April-June decline in the S&P 500 is still relatively mild (10%), the market is clearly shunning risk and this suggest a period of choppy trading at beast or further weakness at worst. We can get clues on the current risk environment by analyzing the last significant inflection points.
Chart 1 shows the S&P 500 along with RSI from May to October 2011. After an 18.8% decline, the index moved into a volatile trading range. From July to September 2011, note that many economic reports in the US were below expectations and the news out of Europe created great uncertainty, which was reflected in the wild price swings. The pink line shows the 5% Zigzag indicator to filter out price moves less than 5%. There were ten 5% price swings from early August until late September. $SPX appeared to be headed lower after breaking the August low in late September, but suddenly reversed course in early October and broke resistance with a big surge the entire month. RSI turned oversold in early August and then hit resistance in the 50-60 zone throughout August and September. This corrective period did not end until RSI broke above 60 in late October and $SPX broke its mid September high. These breakouts marked a clear trend reversal for the S&P 500.
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Chart 1
There was an earlier signal as the market moved from risk-off to risk-on prior to the RSI and $SPX breakouts. The four lower charts show the S&P 500 ETF (SPY), 20+ Year T-Bond ETF (TLT), US Dollar Fund (UUP), US Oil Fund (USO) and Gold SPDR (GLD). Notice how SPY and USO broke resistance in the second week of October (green dotted line). This move to riskier assets was countered by support breaks in TLT and UUP. Money was clearly moving from treasures and the Dollar to stocks, oil and the Euro. GLD followed with a resistance breakout towards the end of October.
MARKETS REMAIN IN RISK OFF MODE AS SPY HITS RESISTANCE... Chart 2 shows the S&P 500 ETF (SPY) for the current perspective. First, the April-May decline was only 10% and much less than the July-August plunge. Second, the June surge produced the first 5% swing. Third, SPY has yet to break its first resistance level and RSI has yet to break above 60. Current conditions are bearish and we could see volatility with the news flow over the next few weeks. We have Greek elections on Sunday, a Fed policy statement next Wednesday, more details on the Spanish bailout next week, an EU Summit at the end of the month and the US employment the first week of July.
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Chart 2
The intermarket charts paint a risk-off picture overall. In addition to SPY being in bear mode, the 20+ Year T-Bond ETF has yet to break support and the Dollar remains in an uptrend. The market is avoiding risk and seeking safe haven when these two trend higher. A sustainable rally in stocks is unlikely as long as TLT and UUP remain in uptrends. Also notice that the US Oil Fund is trending lower and shows no signs of buying pressure. In an interesting twist, GLD broke out last week and has been trending higher since mid May.
TECHNOLOGY SPDR HOLDS ISLAND REVERSAL AND QQQ HOLDS GAP... Chart 3 shows the Technology SPDR (XLK) holding its island reversal, but having trouble with follow through as resistance takes hold in the 28.50 area. There are two distinct trends on this chart. First, the medium-term trend is down because the ETF has been trending lower since early April. Second, the short-term trend is up because the island reversal is holding. This means the short-term uptrend is a counter trend move within the bigger downtrend. First, lets focus on the medium-term downtrend. The blue lines show the Raff Regression Channel extending from the April high to the June low. The middle line is a linear regression and the outer lines are set equidistance from this linear regression. The furthest high or low sets the distance of the outer lines, which is the May 1st high in this case. I am marking resistance where the upper trendline ends. A move above this level would break the Raff Regression Channel and reverse the downtrend. This means we need follow through to the island reversal.
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Chart 3
XLK formed two island reversals in the last eight weeks. The first occurred in late April with a gap above 29.50 and close above 30 the next day. XLK stalled the next 4-5 days and then broke down in early May (after the employment report). Notice how XLK gapped back below 29.50 on May 4th. Since the June island reversal, XLK has moved into a stalling stage the last four days. The island reversal remains short-term bullish as long as the gap holds. A move into the gap zone (below 27.7) would set the stage for a failure and be short-term bearish. Such a move would put the medium-term and short-term trends in bear mode and project a move to new lows. Chart 3 shows the Nasdaq 100 ETF (QQQ) with similar characteristics.
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Chart 4
FIRSTTRUST INTERNET ETF CHANNELS LOWER... Within the technology sector, chartists should watch four key groups: internet, networking, semis and software. Fortunately, these four groups can be followed using ETFs. The charts below show these four ETFs along with the top ten components. Notice that the FirstTrust Internet ETF (FDN), Networking iShares (IGN) and Software iShares (IGV) are weighted by market cap and favor the biggest companies within the industry group. Conversely, the Semiconductor SPDR (XSD) weights its components more evenly and the top ten stocks account for less than 30% of the ETF. Tech titan Intel (INTC) weighs less than 3%. Chartists can use the Market Vectors Semiconductor ETF (SMH) if they want a semiconductor ETF that favors large-caps like INTC, TXN and AMAT.
Chart 5 shows the FirstTrust Internet ETF (FDN) peaking in late March and moving steadily lower into early June. The upper trendline is an internal trendline because it cuts through the late April high. Despite this cut-through, the trendline is matches two peaks and aligns with the lower trendline to create a channel. After a gap down and lower low in early June, the ETF forged a short-term reversal with a gap up last week (island reversal). The gap is holding, but FDN remains below medium-term resistance just above 35. Follow through is needed to break resistance and reverse the medium-term downtrend.
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Chart 5
Chart 6 shows the Networking iShares (IGN) forging a short-term reversal in early June, but then meeting stiff resistance just above 26. Resistance here stems from the Raff Regression Channel and last weeks long black candlestick. IGN tried gain on Monday, but was turned back with another long black candlestick as the strong open faded. A break above last weeks high is needed to get the bulls back in business. The indicator window shows the Commodity Channel Index (CCI) turning negative in early April and remaining negative throughout the downtrend. A break into positive territory is needed to turn momentum bullish again.
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Chart 6
SOFTWARE AND SEMICONDUCTOR ETFS ESTABLISH KEY RESISTANCE LEVELS... Chart 7 shows the Semiconductor SPDR (XSD) falling all the way to its lowest levels of 2012 and then bouncing with an island reversal. Despite two long black candlesticks, the island reversal is holding for the most part. However, XSD has yet to follow through and break medium-term resistance at 45. This means the overall trend remains down and semis are weighing on the broader market. Notice that the Price Relative (XSD:SPY ratio) peaked in mid February and hit a new low at the beginning of June.
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Chart 7
Chart 8 shows the Software iShares (IGV) breaking down the second week of May and underperforming SPY the last two months. An island reversal formed last week, but we have yet to see follow through with a break above medium-term resistance. These four technology-related ETFs remain in medium-term downtrends with clear resistance levels to watch. Breakouts in at least three of the four are needed to signal broad strength in the technology sector, which would in turn be positive for the broader market.
