S&P 500 EQUAL WEIGHT ETF UNDERPERFORMING -- DEFENSIVE SECTORS OUTPERFORMING ON SPDR PERFCHART -- XLU AND XLP HIT 52-WEEK HIGHS AS XLV BREAKS RESISTANCE -- XLY, XLK, XLF AND XLI CONSOLIDATE WITH TRADING RANGES
S&P 500 ETF TURNS INDECISIVE BELOW RESISTANCE... Link for todays video. The stock market is looking ahead to next week and the potential for more stimulus. It used to be stimulus first and market response second. Now it appears that the market is getting ahead of the curve by giving its response before there is any stimulus - or even talk of stimulus. The Bank of England announced strong stimulus measures, but the European Central Bank (ECB) and the Fed have the same line. We stand ready if needed. You dont say! Looking ahead to next week, it is little wonder the market is expecting an adrenalin announcement. The Greek election is Sunday and coalition talks will begin on Monday. The G20 summit starts early next week, the Fed makes its policy statement on Wednesday and Spain will find out exactly how much bailout money it will receive. There are plenty of openings for adrenaline junkies.
But what do the charts say? After a big open on Monday, stocks fell back and closed weak. The major index ETFs formed long filled (black) candlesticks. Trading since Monday has been flat with many ETFs still within Mondays range. All in all, it amounts to indecision ahead of what could be a decisive week. Chart 1 shows the S&P 500 ETF (SPY) stuck as it oscillates around 132 the last eight days. Mondays high-low range marks the boundaries and a break from this range will provide the next directional clue. While an upside breakout would be positive, the next resistance area is not far off. Broken support and the 61.80% retracement mark resistance around 136. Also notice that RSI is moving into its resistance zone (50-60). With volatility high and my right knee twitching, I would treat breakouts will caution.
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Chart 1
S&P 500 EQUAL WEIGHT ETF UNDERPERFORMING ... Chart 2 shows the Rydex S&P 500 Equal Weight ETF (RSP). This ETF has the same stocks as SPY, but with equal weightings. This means it favors the small and mid-caps within the index. In contrast, SPY clearly favors the large-cap because it is weighted accordingly. RSP sports a similar pattern as the ETF oscillates around 48. Continued relative weakness in this ETF is my main concern though. Relative to SPY, RSP has been underperforming since February and the Price Relative hit a new 2012 low this week. Relative weakness in small and mid-caps is negative for the market overall and argues for a cautious stance going forward.
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Chart 2
DEFENSIVE SECTORS OUTPERFORMING ON SPDR PERFCHART... There are nine sector SPDRs and these can be divided into three groups: offensive, defensive and commodity. The Consumer Discretionary SPDR (XLY), Technology SPDR (XLK), Industrials SPDR (XLI) and Finance SPDR (XLF) represent the four offensive sectors because their performance is critical to a healthy market overall. The Utilities SPDR (XLU), Healthcare SPDR (XLV) and Consumer Staples SPDR (XLP) represent the three defensive sectors that perform best during times of uncertainty. The Basic Materials SPDR (XLB) and the Energy SPDR (XLE) represent the two commodity ETFs. PerfChart 3 shows the performance for these SPDRs over the last three months. First, notice that the offensive and commodity sectors are all down for this period. Finance, technology and industrials are all underperforming the S&P 500 because they are down more than this benchmark index. Second, notice that the three defensive SPDRs are up. Not only are these three outperforming the S&P 500, but they are also up over the last three months. These performance metrics show a defensive oriented market.
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Chart 3
XLU AND XLP HIT 52-WEEK HIGHS AS XLV BREAKS RESISTANCE... In addition to relative strength on the PerfChart, we are also seeing relative strength on the price chart. There are many ways to measure relative strength or relative weakness. Chartists can compare the percentage gain/loss, use ratio charts are compare relative levels using the price chart. Clearly, an ETF hitting a 52-week high shows more chart strength than an ETF not hitting a 52-week high. Chart 4 shows the Utilities SPDR (XLU) hitting a 52-week high after breaking resistance in early June. Broken resistance turns first support and there could be a throwback to this level if the market embraces risk next week.
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Chart 4
Chart 5 shows the Consumer Staples SPDR (XLP) breaking above its April-May highs with a long white candlestick on Thursday. Notice the ETF broke support in early June, but quickly recovered and filled the gap. This was a classic bear trap.
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Chart 5
Chart 6 shows the Healthcare SPDR (XLV) breaking the May trendline and then surging above its late May high. The Price Relative hit a fresh 52-week high this week and XLV shows relative strength. Note that the Supreme Court could rule on the healthcare law soon and this could affect these stocks.
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Chart 6
XLY, XLK, XLF AND XLI CONSOLIDATE WITH TRADING RANGES... As far as broad market health, I am more concerned with the performance of the four offensive sectors. All four are trading in ranges over the last eight days. Upside breakouts would be bullish for the market and signal a continuation of the early June surge. Support breaks would be bearish and keep the medium-term downtrends in place. Chartists can apply a Dow Theory approach to these breakouts by looking for multiple confirmations. Breakouts by at least three of the four would be market bullish, while support breaks by three of the four would be market bearish.
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Chart 7
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Chart 8
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Chart 9
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Chart 10
GLD SURVIVES FIRST TEST AS AROON TURNS BULLISH... Chart 11 shows the Gold SPDR (GLD) breaking resistance with a surge on June 1st and then testing this breakout with a rather sharp pullback last week. The test appears successful as GLD bounced back towards 158 this week. Overall, GLD broke the March trendline and exceeded the late May high with this June breakout. The sharp throwback found support at 153 and the advanced the last six days (including today so far). This move reinforces support at 153. The indicator window shows the Aroon oscillators crossing bullish for the first time since late February. Notice that Aroon Up (green) moved above Aroon Down (red).
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Chart 11
On the weekly chart, GLD bounced off long-term support and the Stochastic Oscillator turned up from oversold levels. The bulls have a clear edge as long as the Stochastic Oscillator remains above its signal line (red). There is concern here that a descending triangle is forming because this is a bearish pattern. However, the support bounce rules the chart for now and I will keep this pattern on the back burner.
