S&P 500 FORMS BEARISH WEDGE -- RUSSELL 2000 EXCEEDS CHANNEL TRENDLINE -- TREASURIES HOLD SUPPORT AS 10-YEAR YIELD FAILS AT 1.7% -- TECHNOLOGY SPDR REVERSES AT KEY RETRACEMENT -- NETWORKING AND SEMICONDUCTOR ETFS FAIL AT JUNE HIGHS
S&P 500 FORMS BEARISH WEDGE ... Link for todays video. Stocks fell sharply after payrolls rose less than expected. The Labor Department reported that June non-farm payrolls rose 80,000, which was well below the consensus forecast of 100,000. Non-farm payrolls were also revised down by 1000 for each of the prior two months. For the most part, economic data has been below expectations the last 3-4 months and this week was no exception. Unsurprisingly, stocks fell and treasuries advanced on this news. The markets watch the jobs number closely because that is what the Fed watches. With another report coming in below expectations, the expectations for more quantitative easing will increase. This week alone we saw the Bank of England (BOE) increase its quantitative easing program, the European Central Bank (ECB) embark on a wide array of interest rate cuts and the Peoples Bank of China (PBOC) cut interest rates for the second time. Slowing growth is clearly not just a US phenomenon, it appears to be a global issue.
Chart 1 shows the S&P 500 moving higher since early June. Is this the start of a new bull move or is it just a correction within a bigger downtrend? I will stay in the correction camp. With a modest decline the last two days, the index has a rising wedge pattern working. Technically, the trend is up as long as the wedge rises. A move below the lower trendline would provide the first signs of a trend reversal. A break below 1300 would fully reverse this five week uptrend. This would also break the 200-day moving average and call for a continuation of the April-May decline. The indicator window shows the PPO remaining in positive territory. A PPO move back into negative territory would turn momentum bearish.
(click to view a live version of this chart)
Chart 1
RUSSELL 2000 EXCEEDS CHANNEL TRENDLINE... Chart 2 shows the Russell 2000 ($RUT) surging to 820 this week and then falling back below 810 today. This small-cap index gained some 8% from the late June low and exceeded the upper trendline of a rising channel. Both the outsized gain and trendline break indicated that the index was overbought. As with the S&P 500, I view this advance as a counter trend rally within a bigger downtrend. The May decline broke key support levels and this advance is the first reaction after the trend reversal. The lower trendline of the rising channel marks first support and the late June lows mark key support. The indicator window shows the Percent Price Oscillator (PPO), which is the percentage version of MACD. Momentum has been trending higher since early June. A trendline break and move into negative territory would turn momentum bearish.
(click to view a live version of this chart)
Chart 2
TREASURIES HOLD SUPPORT AS 10-YEAR YIELD FAILS AT 1.7%... The weak jobs number boosted treasuries, which benefit from economic weakness and the prospects of further Fed easing. Chart 3 shows the 20+ Year T-Bond ETF (TLT) breaking out of a large triangle pattern with a big surge in May. The ETF was clearly overbought at 130 and then alleviated this overbought condition with a pullback and consolidation. After establishing support in early June, the ETF traded sideways around the 125 area and held the early June low throughout. No signs of weakness here. Support from the June lows holds the key for TLT and for SPY because these two are negatively correlated for the most part. A break below the June lows would be negative for treasuries and positive for stocks, but it aint happened yet.
(click to view a live version of this chart)
Chart 3
Chart 4 shows the 10-year Treasury Yield ($TNX) with a mirror image of TLT. $TNX broke support at 17 and this level turned into resistance in June. The yield failed at 1.7% again this week and remains in a downtrend. A downtrend in treasury yields translates into a slowing economy. A break above 17 is needed to reverse this trend.
(click to view a live version of this chart)
Chart 4
TECHNOLOGY SPDR REVERSES AT KEY RETRACEMENT... The Technology SPDR (XLK) is getting hit especially hard on Friday. Chart 5 shows XLK forming a rising wedge the last five weeks and hitting resistance near the 61.80% retracement. Both the rising wedge and the retracement amount are typical for corrective advances within bigger downtrends. A break below the wedge trendline would provide the first sign of a continuation lower. The indicator window shows the Price Relative (XLK:SPY ratio) moving lower in April and then trading flat in May-June. XLK did not outperform the broader market during the June advance. In other words, technology showed relative weakness. This furthers the bearish case for this key sector.
(click to view a live version of this chart)
Chart 5
NETWORKING AND SEMICONDUCTOR ETFS FAIL AT JUNE HIGHS... I am also seeing relative weakness in the Networking iShares (IGN) and the Market Vectors Semiconductor ETF (SMH), which represent two key groups within the technology sector. Chart 6 shows SMH breaking down in May and then bouncing back to broken support in mid June. While SPY moved above its mid June high, SMH did not and showed relative weakness. The support break held and resistance has been affirmed at 33 with the decline on Thursday-Friday. The indicator window shows the SMH:SPY ratio peaking in February and moving to a new low today. Semis represent a key technology group and a cyclical industry. Relative weakness is negative for the market overall.
(click to view a live version of this chart)
Chart 6
Chart 7 shows the Networking iShares (IGN) falling over 2% on Friday. Notice that IGN broke down in April, well ahead of the broader market. The ETF declined to its October low in early June and then firmed the last five weeks. While the broader market moved higher in June, IGN stalled and could not break above 26. This showed relative weakness, which is confirmed by the steady decline in the Price Relative (IGN:SPY ratio).
(click to view a live version of this chart)
Chart 7
EURO FAILS AT BROKEN SUPPORT... The Euro Currency Trust (FXE) got a big boost from the EU summit last week, but gave it all back after the European Central Bank (ECB) cut interest rates this week. Chart 8 shows FXE within a clear downtrend. The ETF broke support from the January low and broken support turned resistance in June and July. FXE failed at this broken support level twice as a triangle formed below the support break. With a sharp decline the last two days, FXE broke triangle support to signal a continuation of the current downtrend. Chart 9 shows weekly prices with the next support zone around 118 from the 2010 lows.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
GLD FORMS TRIANGLE CONSOLIDATION AT SUPPORT ... It seems that easy monetary policy around the world would be bearish for currencies and bullish for gold, which is the un-currency. Gold may be a bit confused because the Dollar surged the last two days and gold is normally negatively correlated with the greenback. Chart 10 shows the Gold SPDR (GLD) consolidating near its 2011 lows with a triangle the last 5-6 weeks. Technically, this is a triangle within a downtrend, which gives it a bearish bias. A break below 150 would signal a continuation lower and target a move to the 140 area. The onus is on the bulls to prove the bears otherwise. A break above 160 would be bullish and open the door to higher bullion prices. The indicator window shows RSI banging its head against the 60 level. Momentum favors the bears as long as RSI remains below 60.
(click to view a live version of this chart)
Chart 10
