SETTING DOWNSIDE TARGETS FOR S&P 500 AND THE DOW -- XLY FORMS BEARISH WEDGE AND HITS RESISTANCE -- SILVER TRUST TESTS 2011 LOW AS BASE METALS ETF BREAKS DOWN -- GOLD FAILS TO HOLD BREAKOUT AND SETS UP SUPPORT TEST
SETTING DOWNSIDE TARGETS FOR S&P 500 AND THE DOW... Link for todays video. The European debt crisis has certainly dominated the news over the last few months and EU problems have been blamed for weakness in US equities. While EU woes may be partly to blame, I think slowing growth in the US is more to blame. European issues are definitely important to Europeans, but the debt crisis is really just a sideshow in the US. Similarly, US issues are a sideshow in Europe. European debt issues have been dominating the news since early 2010, which is when the Greek troubles first started. The S&P 500 has been a roller coaster since early 2010, but the index is still up since January 2010. The US economy is the main act for the US stock market.
In an interesting twist, the current situation in the US is looking just like June-July-August 2011. Economic data took a dip in this period and the S&P 500 got hit hard in August. After a turbulent summer, the stock market bottomed in the fall and surged to new highs in early 2012. Are we due for a repeat? Perhaps. At the very least, we need to see economic reports beat expectations and the employment report surprise to the upside. Such news would push money out of treasuries and into the stock market. As John Murphy noted on Thursday, stocks and treasuries compete for money. Sustainable gains in the stock market are unlikely as long as treasuries remain strong. Chart 1 shows the S&P 500 over the last three years. I am sticking with my forecast for the S&P 500 to move into the 1200-1250 area by October-November. This forecast is based on a rising channel taking shape since 2010 and a 50-61.80% retracement of the prior advance. The 13-week slope remains in negative territory and has yet to make a sharp u-turn. Chart 2 shows the Dow with a target in the 11500-11700 area.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
XLY FORMS BEARISH WEDGE AND HITS RESISTANCE... The consumer discretionary sector is clearly the most consumer centric sector and the most economically sensitive. This makes it the most important of the nine sectors. Chart 3 shows the Consumer Discretionary SPDR (XLY) leading the market from January to April with a strong advance. XLY got derailed with a sharp decline in May and broke support from the April lows. The ETF tried to reclaim this support break in June, but failed to hold above 44 after a sharp decline on Thursday. The June pattern looks like a rising wedge, which is typical for corrections within bigger downtrends. XLY is currently testing the lower trendline and a break would signal a continuation of the May decline. This would target a move to the Fibonacci cluster around 39-40. Needless to say, such a move would be bearish for the broader market. The indicator window shows the XLY:SPY ratio, which reflects the performance of XLY relative to SPY. XLY outperformed as the ratio rose from January to April. The ratio turned flat in May and tested support. A break below support would signal relative weakness in this key sector.
(click to view a live version of this chart)
Chart 3
Retailers are an important part of the consumer discretionary sector. With over 100 retail stocks, the Retail SPDR (XRT) represents an excellent cross section of American retail. Chart 4 shows XRT with a double top support break and broken support turning into resistance. The ETF tried to reclaim the support break, but failed three times in the last four weeks. The bears are clearly in control as long as resistance at 60 holds.
(click to view a live version of this chart)
Chart 4
SILVER TRUST TESTS 2011 LOW AS BASE METALS ETF BREAKS DOWN... Signs of weakness in the global economy can be seen in the Silver Trust (SLV) and the Base Metals ETF (DBB). Chart 5 shows the Silver Trust breaking down over the last two days and testing its 2011 low. On a closing basis, SLV did close at a new low this week. With this weeks rising flag break, we can now mark key resistance at 29. A move above this level is needed to reverse the downtrend in silver and signal an upturn in global demand. The indicator window shows SLV relative to SPY. This ratio has been falling since August 2011.
(click to view a live version of this chart)
Chart 5
Chart 6 shows the Base Metals ETF moving below its 2011 lows with a sharp decline this week. The ETF may be oversold after an 18% decline since early March, but there is no sign of an uptrend. Notice that DBB and SPY are positively correlated. With both moving in the same direction, a new low in DBB should be considered bearish for stocks.
(click to view a live version of this chart)
Chart 6
While European issues are not fully to blame for US woes, economic weakness in Europe is certainly not helping the global economy. A slowdown in China is also exasperating the economic picture and putting a damper on demand for industrial metals. While few expect the Chinese economy to go into recession, growth could slow enough to affect global demand for raw materials (metals, oil etc...). Chart 7 shows the Shanghai Composite ($SSEC) failing at the 200-day SMA in early May and breaking triangle support in early June. The index fell sharply again this week and a test of the lows looks likely.
(click to view a live version of this chart)
Chart 7
GOLD FAILS TO HOLD BREAKOUT AND SETS UP SUPPORT TEST... A failed signal can be just as valuable as a signal. Over the last few weeks, I showed the Gold SPDR (GLD) as it bounced off support and showed signs of stabilizing. I marked short-term resistance and noted that CCI should confirm a breakout with a move into positive territory. Prior signals in July, late October and early January foreshadowed decent bounces. The latest signal, early June, failed as GLD did not follow through and did not exceed 160. Instead, GLD turned sharply lower this week and clearly negated the resistance breakout. With this signal negated, it looks like the descending triangle is back in play. Chart 9 shows weekly prices for Spot Gold ($GOLD). Notice that gold peaked in August and then formed a series of lower highs. The most recent bounce off support was the weakest as gold failed to exceed 1650, which now becomes key resistance. A descending triangle break down would target a move to the next support zone around 1300-1350.
(click to view a live version of this chart)
Chart 8
