S&P 100 CHALLENGES SPRING HIGH -- PERCENT OF S&P 500 STOCKS ABOVE 200-DAY SURGES -- NY AD LINE HITS NEW HIGH -- SILVER TESTS SUPPORT FROM 2011 LOWS -- GOLD EXTENDS CONSOLIDATION AS BANDWIDTH NARROWS -- DOLLAR CORRECTS, BUT REMAINS IN UPTREND
S&P 100 CHALLENGES SPRING HIGHS... Link for todays video. S&P 100 is leading the market as it challenges its prior highs. Chart 1 shows the index hitting 645, which marks resistance from the April high. Given the strength of this uptrend, I would not consider the April high as a hard resistance level. The trends are up and this means resistance levels are more likely to be broken. Support levels hold the key during uptrends. The June low marks major support around 580 and I would mark medium-term support at 610.
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Chart 1
The indicator window shows the $OEX:$RUT ratio turning up in the summer of 2011 and moving to a 52-week high recently. This is clearly a large-cap affair. While it may signal a flight to quality and reflect relative weakness in small-caps, the bulk of the evidence is bullish for the stock market as a whole. The best we can do it identify the trend and trade accordingly until it changes. According to Dow Theory, neither the length nor the duration of a trend can be forecast. Below I will show some breadth indicators that back up the current bullish case.
PERCENT OF S&P 500 STOCKS ABOVE 200-DAY SURGES... Recently, the Nasdaq 100 ETF (QQQ) broke above resistance from the July highs and the S&P 500 ETF (SPY) surged towards its spring highs. Strength in these two ETFs is reinforced with breakouts in two key breadth indicators. The Nasdaq 100 %Above 200-day SMA ($NDXA200R) and the S&P 500 %Above 200-day SMA ($SPXA200R) both broke out of trading ranges this month. Chart 2 shows $NDXA50R falling sharply in May and then trading flat between late May and early August. Notice how the indicator oscillated around the 50 level for over two months. The low was around 44% and the high near 60%. The surge above 67% signals that participation in the advance is broadening, which is a good sign, provided it holds. A plunge back to the 50% level would signal another stalemate. A break below support at 44% would be outright bearish.
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Chart 2
Chart 3 shows $SPXA200R breaking down in May and plunging below 50% for a brief period (yellow area). The indicator did not hold below 50% for long and then established a trading range in the 52% to 66% area. There is nothing special about these levels, but they are above 50%. In general, this indicator favors the bulls when more than 50% of stocks are above their 200-day moving average. With the August surge, more than 70% of S&P 500 stocks are above their 200-day moving average. It is hard to be bearish in the face of such a statistic.
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Chart 3
NY AD LINE HITS NEW HIGH... It is also hard to argue the bearish case when the NYSE AD Line ($NYAD) hits a new all time high. Chart 4 shows the NYSE AD Line breaking above its spring highs and then consolidating for a few weeks. With last weeks surge, the indicator moved above consolidation resistance to establish a new high. The July lows now mark the first support level to watch for signs of weakness.
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Chart 4
Chart 5 shows the Nasdaq AD Volume Line, which is my preferential breadth indicator for the Nasdaq. The Nasdaq AD Volume Line ($NAAD) is still underperforming the Nasdaq because the indicator has yet to break its early July high. However, the AD Volume Line did break above the mid July high and the April trend line. At the very least, the AD Volume Line reversed the July downtrend and this is bullish until proven otherwise.
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Chart 5
SILVER TESTS SUPPORT FROM 2011 LOWS... Silver is a half-breed metal that represents both industrial metals and precious metals. Industrial metals are closely tied to economic performance. Both silver and gold should benefit from the various forms of quantitative easing from central banks around the world. Despite lots of liquidity these, two are still languishing near support and near 52-week lows. Relative weakness in silver suggests lackluster demand from the global economy. Chart 6 shows Spot Silver ($SILVER) peaking in May 2011 and testing the 2011 lows recently. Silver first established support with a spike to 26 in September 2011. There was another low here in December 2011 and the metal is again testing 26 in July-August. A consolidation of sorts formed the last few weeks and a break below consolidation support would signal a continuation of the bigger downtrend. This would be a negative sign for global demand and the global economy. I am marking key resistance a 30. A successful support test and surge above 30 would reverse this negative outlook. Chart 7 shows Spot Copper ($COPPER) firming the last few months and the July highs marking key resistance. Copper remains in a downtrend at this point and it would take a break above the July high to reverse this downtrend. A breakout in Dr Copper would be positive for global equities.
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Chart 6
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Chart 7
GOLD EXTENDS CONSOLIDATION AS BANDWIDTH NARROWS ... Gold may be about to make a move. First, lets look at the weekly chart for Spot Gold ($GOLD). Chart 8 shows gold consolidating near support from the lows extending back to September 2011. This consolidation just happens to be 14 weeks. Resistance is set at 1650 and support at 1550. Watch these levels for the next directional signal. The indicator window shows the 14-period Stochastic Oscillator moving higher the last few weeks. Why? The Stochastic Oscillator measures the level of the close relative to the high-low range over 14 periods and the current consolidation just happens to be 14 periods. A Stochastic Oscillator value above 50 means the current price (~1619) is in the upper half of the 14 period range. One could say the cup is half full.
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Chart 8
Chart 9 shows the Gold SPDR (GLD) with Bollinger Bands narrowing over the last few weeks. The blue dotted lines mark periods when BandWidth dipped below 4%. This represents a significant narrowing of the bands that often foreshadows a big move. Narrowing bands do not provide a directional clue. Chartists must rely on the price chart of other indicators for directional clues. There are some signs of strength as GLD edges towards resistance from the July highs. A breakout at 158 would be bullish and argue for a move into the low 170s. I must warn traders that there is sometimes a head fake before the real move. Notice how BandWidth dipped below 4% in late February and GLD broke resistance. This breakout did not hold long as GLD plunged to the lower band for a bearish signal.
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Chart 9
DOLLAR CORRECTS, BUT REMAINS IN UPTREND... When it comes to gold, chartists should keep in mind the inverse relationship between gold and the Dollar. In the indicator window of chart 10, the Dollar bottomed in April 2011 and gold peaked in August 2011 (blue arrows). The Dollar is up some 13% from its 2011 low and gold is down some 15% from its 2011 high. In the main window, the US Dollar Index ($USD) remains in a clear uptrend since April 2011. The index has been zigzagging higher and forged a higher high just this month. Despite the setback over the last two weeks, the index remains well above first support at 81. Support here stems from broken resistance, the June low and the September trend line.
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Chart 10
EUROPEAN STOCKS CHALLENGE MARCH HIGHS... EU stocks are certainly excited about something. I thought the European Central Bank (ECB) was going to buy sovereign debt. The stock market seems to think the ECB is going to buy stocks. Joking aside, chart 11 shows the European Top 100 Index ($EUR) moving higher for 10 consecutive weeks. That is an amazing run. With this move, the index is poised to challenge its March high in the 230 area. The blue trend lines show that this index is no stranger to big swings. In the last 30 months, there have been at least six swings that were greater than 12%. Such strength in big European stocks, many of which are banks, is positive for the EU and global equities. The index, however, is getting overbought and ripe for some sort of pullback or consolidation.
