DOW BACKS OFF 13000 FOR THE SECOND TIME -- RUSSELL 2000 BREAKS KEY SUPPORT -- FINANCE SPDR STARTS POSSIBLE WAVE 3 OF III -- HOME CONSTRUCTION ETF BUCKS THE TREND WITH PENNANT FORMATION -- GOLD AND SILVER ETFS FIRM WITHIN CONSOLIDATIONS
DOW BACKS OFF 13000 FOR THE SECOND TIME... Link for todays video. Stocks were down on Monday as European issues weighed on the market. Chart 1 shows the Dow Industrials hitting resistance just below 13000 for the second time this month. Resistance here is proving formidable and chartists should watch key support at the mid June low. Notice that the Dow has been zigzagging higher since early June with a series of rising peaks and rising troughs. The bulls have an edge as long as the peaks and troughs keep rising. A move below the last two troughs would break key support and signal a continuation of the May decline. Such a development would be quite bearish because it means the Dow peaked below its May high. Moreover, a continuation of the May decline would project further weakness below the June low. Based on the Fibonacci retracements and the lows in November-December, I would expect a decline into the 11600-11800 area. The indicator window shows the Percent Price Oscillator (PPO) turning positive towards the end of June and holding positive. A break into negative territory would turn momentum bearish and could be used to confirm a support break in the Dow.
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Chart 1
RUSSELL 2000 BREAKS KEY SUPPORT... Chart 2 shows the Russell 2000 ($RUT) testing support from the early July low on Monday. $RUT formed a rising channel in June-July and also broke the lower trend line today. This means a lower high formed at 820 and this key small-cap barometer looks poised to continue its April-May decline. A continuation lower would target further weakness towards the 700 area. Notice that the 61.80% retracement and December low mark support here. I am especially concerned with recent relative weakness in small-caps as well. The indicator window shows the price relative ($RUT:$SPX ratio) surging in late June, but giving back most of this surge in July. Small-caps have been seriously underperforming this month and this is negative for the market overall.
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Chart 2
FINANCE SPDR STARTS POSSIBLE WAVE 3 OF III... Chart 3 shows the Finance SPDR (XLF) breaking below the early July low and starting what could be Wave 3 of III down. Assuming the early October low marks the end of a big first wave down (I), the advance from October to March looks like an ABC correction that formed Wave II. Notice that Wave C breaks down into five smaller waves. This makes sense because Wave B and Wave C are impulse waves in an ABC correction. The end of Wave 5 also marked the end of Wave C and the bigger Wave II. The decline from April to early June broke down into five smaller waves to become Wave 1 down. It looks like the Wave 2 advance is completing and XLF is beginning Wave 3 of III. If this assumption holds, chartists can expect a sharp and extended decline because both 3 and III are down waves.
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Chart 3
Chart 4 shows the Regional Bank SPDR (KRE) breaking channel support with a sharp decline the last two days. With a peak around 28, it looks like KRE formed a lower high. This means the channel break signals a continuation of the prior decline and a move below the June low is expected. Using the Fibonacci Retracements Tool, the first support zone is around 23.64 and the second is around 22.34.
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Chart 4
HOME CONSTRUCTION ETF BUCKS THE TREND WITH PENNANT FORMATION... Even though stocks were down sharply on Monday, the Home Construction iShares (ITB) bucked the trend and managed a small gain. Chart 5 shows ITB breaking above resistance with a surge at the end of June. Broken resistance turned into support around 16-16.25 as the ETF consolidated above the breakout. This consolidation could turn out to be a pennant or small triangle, a break above which would signal a continuation of the uptrend. ITB remains one of the strongest ETFs in the market right now. The price relative (ITB:SPY ratio) continues to trend higher and hit a new high earlier this month.
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Chart 5
GOLD AND SILVER ETFS FIRM WITHIN CONSOLIDATIONS... Gold continues to act like a risk asset. This means it falls along with stocks, the Euro and oil. This makes sense because gold and the Dollar are negatively correlated for the most part. Chart 6 shows the Gold SPDR (GLD) stalling within a triangle consolidation the last few days. The big trend is down because GLD peaked in August 2011 and is currently trading close to its 52-week low. This triangle amounts to a consolidation within a downtrend, which is typically bearish. A break below triangle support would signal a continuation lower. A trend reversal is still possible as long as GLD consolidates at support. A move above the early July high is needed to break triangle resistance and show some significant buying pressure. The indicator window shows RSI hitting resistance in the 50-60 zone since March. A break above 60 would be bullish for momentum. Chart 7 shows the Silver Trust (SLV) for reference.
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Chart 6
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Chart 7
EUROPEAN TOP 100 INDEX FAILS AT KEY RETRACEMENT... Chart 8 shows the European Top 100 Index ($EUR) failing near resistance and breaking a channel trend line today. This index is like the S&P 100 ($OEX) in the US. After a big decline in 2011, the index rallied with a rising wedge from September to March. $EUR peaked in March, which was ahead of the S&P 500, and broke the trend line of a large rising wedge. This break signaled a continuation of the 2011 decline. $EUR became oversold in early June and bounced back to the 220 area. Resistance here stems from broken support, the late April highs and the 61.80% retracement. With a sharp decline the last two days, resistance has held and the channel break signals a continuation of the March-June decline. This is relevant to US stocks because $EUR has a strong positive correlation to the S&P 500.
