DOW AND S&P 500 HIT RESISTANCE AT MID JUNE HIGHS -- CONSUMER DISCRETIONARY AND RETAIL SDPRS STILL UNDERPERFORMING -- AD RATIOS SHOW HIGH DEGREE OF PARTICIPATION -- S&P 500 %ABOVE 50-DAY SMA REMAINS IN BEAR MODE
DOW AND S&P 500 HIT RESISTANCE AT MID JUNE HIGHS... Link for todays video. Chart 1 shows the Dow Industrials with a pattern similar to the October-December surge, only smaller. The Dow surged in October, corrected in November with a sharp pullback and then surged again at the end of November. After hitting resistance at the October high, the Average again corrected in early December and then continued higher. The four moves are labeled on the chart below. Looking at price action since early June, we can see a surge, a sharp pullback and then a surge to the mid June high. This is a likely resistance area and the Dow is short-term overbought after last weeks surge, which increases the odds of a correction. This means a falling flag or wedge could form over the next few weeks. Notice that a falling flag/wedge correction formed in December. Chartists can mark key support at 12400, a break of which would negate the similarities and call for a move lower.
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Chart 1
The indicator window shows the Percent Price Oscillator (PPO) moving into positive territory and remaining above its signal line. Momentum is clearly bullish now and remains bullish as long as the PPO is in positive territory. A move into negative territory would turn momentum bearish and this would provide the first sign of trouble. Chart 2 shows the S&P 500 with similar characteristics and key support around 1300. Notice that the rising 200-day moving average confirms support here.
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Chart 2
CONSUMER DISCRETIONARY AND RETAIL SDPRS STILL UNDERPERFORMING ... Even though the market reacted favorably to the news out of Europe last week, the Consumer Discretionary SPDR (XLY) is still showing relative weakness and US economic performance is what really matters. There are only four trading days this week, but the economic docket is full with the June employment report scheduled for Friday morning. As noted before, the consumer discretionary is the most economically sensitive sector and one that chartists should watch closely going forwards. Chart 3 shows XLY surging off support from the mid June lows with a move above 43.50 last week. This surge reinforces support from these lows and a subsequent break would be very bearish. It is temping to suggest that the cup is half full, but XLY is actually underperforming the S&P 500 ETF (SPY). The indicator window shows XLY performance relative to SPY using the Price Relative (XLY:SPY Ratio). This ratio peaked in early May, formed a lower high in late May and forged lower lows in June. Even though the downtrend is not especially strong, XLY is clearly underperforming the broader market and this is a potential negative.
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Chart 3
Chart 3 shows the Retail SPDR (XRT) zigzagging higher in June with a rising channel of sorts taking shape. Last weeks surge off support reinforces 56 as the key support level to watch. A failure near resistance at 59 and a break below support at 56 would be bearish for this key retail proxy. The indicator window shows the XRT:SPY ratio breaking support in June and remaining below this support break. Despite an advance in June, XRT is underperforming the broader market and this is a potential negative for retailers.
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Chart 4
AD RATIOS SHOW HIGH DEGREE OF PARTICIPATION ... Distinguishing between dead-cat bounces and sustainable surges is big challenge for chartists. There are often sharp dead-cat bounces within a bigger downtrend. One of these bounces will signal the start of an extended advance, but chartists must distinguish the pretenders from the contenders. There are different ways to measure the strength behind a market move. In particular, I like to use breadth indicators to measure the degree of participation. A high degree of participation increases the chances of sustainability, while a low degree of participation suggests that the move is unsustainable (dead cat bounce). For short-term analysis, chartists can use the advance-decline Ratio to measure the degree of participation. This is simply net-advances divided by total issues. Net-advances equals the number of advancing issues less the number of declining issues. Chart 5 shows the Nasdaq with the AD Ratio in the indicator window. Notice that Fridays advance produced the highest AD Ratio of 2012. This suggests a high degree of participation in the advance and indicates we may see some short-term follow through. On the Nasdaq price chart, the lows extending from the second week of June mark key support.
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Chart 5
Chart 6 shows the NYSE AD Ratio surging to its highest reading since early June. These two readings were both above .70 (70%) and show a high degree of participation in the advance. On the NY Composite price chart, the lows extending from the second week of June also mark key support.
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Chart 6
S&P 500 %ABOVE 50-DAY SMA REMAINS IN BEAR MODE... The AD Ratios can give us an idea on the short-term, but we need a different indicator to measure the medium-term or long-term. Back on May 21st, I showed that the S&P 500 %Above 50-day SMA ($SPXA50R) plunged into bear market territory with a move below 15%. This was the fourth bearish signal in the last five years. A bullish signal is triggered when the indicator surges above 85% and there were three bullish signals the six years. A plunge below 15% shows enough selling pressure to suggest that a downtrend in stocks is emerging. Conversely, a surge above 85% shows strong enough buying pressure to suggest that an uptrend is emerging. It is like a rocket lifting off the launch pad. A strong up-thrust is needed to insure a sustainable advance. With the June advance, this indicator moved above 60%, but remains well short of the 85% threshold required for a medium-term signal.
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Chart 7
Chart 8 shows the Nasdaq 100 %Above 50-day SMA ($NDXA50R) moving into bear mode with the April-May decline. This indicator ended the week at 60% and remains well below the bullish threshold. Notice that the short-term AD Ratios reflect a strong short-term surge, but this strength is within a bigger bearish environment. Medium-term breadth remains bearish and this could cut short a short-term advance.
